Integrative Exercise Cost System Choice, Budgeting, Variance Analysis, Product Costing, and Data Analytics for Dawson Dental Products Budgeting and Variance Analysis Using Only a Single Unit-Level Driver Lawson Dental Products produces two different dental instruments in its St. Louis plant: crown crimping pliers and curved crown scissars. Amy Bunker, production manager, was upset with the latest performance report which indicated that she was $110,000 over the manufacturing budget. Given the efforts that she and her workers had made, she was confident that they had met or beat the budget. Not only was she upset, but she was also genuinely puzzled by the results. Of the four major manufacturing inputs in the manufacturing cost budget (direct materials, direct labor, power, and setups), only the direct materials input was not over budget. The actual costs for these four inputs follow: Amy knew that her operation had produced more than originally had been planned so that more power and labor had naturally been used. She also knew that the uncertainty in scheduling had led to more setups than planned. When she pointed this out to Hector Gomez, the plant controller, he assured her that the budgeted costs had been adjusted for the increase in production activity. Curious, Amy asked about the methods to make the adjustment. Hector: If the actual level of production activity differs from the original planned level, we adjust the budget using what are called flexible budget formulas-formulas that allow us to predict cost for different levels of activity. Amy: The approach seems reasonable. However, I'm sure something is wrong here. Tell me exactly how you adjusted the costs of direct materials, direct labor, power, and setups. Hector: First, we obtain formulas for the individual items in the budget by using the method of least squares. We assume that cost variations can be explained by variations in production activity where activity is measured by direct labor hours. Here is a list of the cost formulas (flexible budget formulas) for the four items you mentioned. The variable X is the number of direct labor hour. Direct materials cost =$5x Direct labor cost =$15X Power cost =$5,000+$4X Setup cost =$100,000 20,000 direct labor hours. Required: 1. Using the actual 20,000 direct labor hours, calculate what the costs should have been for each of the four manufacturing cost inputs. What are the total after-the-fact budgeted manufacturing costs? \$ 2. Prepare a performance report using the flexible budget outcomes in Requirement 1 . Does the report confirm that Amy is overbudget by the amount initially claimed? The performance report confirms that Amy is by $ hours allowed for the actual output were 20,500 hours. a. Calculate the labor rate and efficiency variances. LRV b. Explain the most likely cause(s) of these two variances. The labor rate variance is likely due to the overtime mentioned by Hector. The overtime is attributed to the than expected demand. The efficiency variance may be due to the "efforts" that Amy and her workers made to meet the demand for the products. 4. Refer to Exhibit 2.2. a. Which data analytic type or types best describe the calculation in Requirement 1 ? The words "should have been" suggest a data analytic type. usually refers to what "will be." b. Consider Requirements 3a and 3b. Which data analytic type(s) best describe these two requirements? The calculations of 3a are in nature. They describe what is. Requirement 3a is attempting to explain the why of the variances and is, therefore, in nature. Budgeting, Variance Analysis, and Product Costing: Multiple Drivers Considered After considering the explanations and analyses offered by Hector, the interaction between the two continued as follows. than direct labor hours. Also... equations, however, is much better. It explains about 96% of the cost variation in each case. Setup costs, of course, are fixed. Also, there are supplies that are used for each setup and they are not cheap. Did you build these extra costs of increased setup activity into your budget? based on better explanatory variables. I'll get back with you in a few days. After a few days' work, Hector developed the following flexible budget formulas, all with a coefficient of determination greater than 90\%: Direct materials cost =$5X, where X= Direct labor hours Direct labor cost =$15X, where X= Direct labor hours Power cost =$68,000+0.9Y, where Y= Machine hours Setup cost =$98,000+$400Z, where Z= Number of setups The actual measures for each of the activity drivers are as follows: budgeted manufacturing costs? $ How does this compare with the total expected costs calculated in Requirement 1 ? The expected costs are $ higher than those of Requirement 1 giving a much benchmark than the single-driver flexible budget formulas gave. 6. Prepare a performance report using the flexible budget outcomes in Requirement 5 . Does the report validate the concerns expressed by Amy about the traditional performance report? Explain. It strongly Amy's concern and shows that her performance was actually very . She is overbudget by only 4 instead of 4 . The variance is than 1% of the budgeted costs. 7. Assume that the following activity usage is provided for each of the two products: your answer to two decimal places. serDLH Round each rate calculation to the nearest dollar except for power rate; round it to the nearest cent. Use rounded amounts in subsequent calculations. c. Compare the product line cost assignments made in 9 a and 9b. Which do you consider to be the more accurate? Explain. Using the activity-cost assignments as the benchmark, the crimping pliers are undercosted by $ and the crown scissors are overcosted by $ . The activity-based cost assignments are likely to be accurate as they reflect the consumption of the activity resources more completely. 8. Discuss the role of data analytics in the interaction between Amy and Hector. Data analytics played a role in Hector's reaction to Amy's concerns. Hector immediately saw the of using only direct labor hours as a basis for creating different explanatory variables. Both Amy and Hector used methods that led to the creation of new flexible budgeting formulas