Larcker Variance Case

Larcker Inc. manufactures a single product, DLZ. Larcker uses budgets and

standards in its planning and control functions. Larcker makes use of its standards

in order to derive their budgeted cost per unit. For example, Exhibit A provides

information on the budgeted variable costs per unit. When determining direct

material costs for the planning budget income statement, the $12 budgeted material

cost per unit of DLZ would be used in the calculation.

Exhibit A

Budgeted

(Standard)

Variable Costs Per

Unit of DLZ

Raw material: 3 pounds at $4 per pound $12

Direct labor: 1 direct labor hour at $9 per hour 9

Variable overhead: 1 direct labor hour at $11 per hour 11

Total variable budgeted (standard) cost per DLZ $32

__________________________________________________________________

The standards for fixed manufacturing overhead costs are: 1 direct labor hour at $8

per hour. The standard fixed manufacturing overhead cost per hour is calculated

based on a denominator level of activity of 40,000 direct labor hours.

The planning budget income statement is based on the expectation of selling 40,000

units of DLZ. The budgeted sales price is $56 per unit, and total budgeted fixed

selling and administrative costs are $140,000. There are no variable selling and

administrative costs in this firm.

The company actually produced and sold 45,000 units this year. The company never

has a beginning or ending raw materials inventory, because it uses all raw materials

purchased. Also, the company never has a beginning or ending finished goods

inventory. Everything produced in the year is sold in that same year.

2

The actual income statement for the year is provided in Exhibit B.

Exhibit B

_______________________________________________________________

Larcker Inc.

Actual Income Statement

Sales:

45,000 units produced and sold at $55 $2,475,000

Less Variable Costs:

Direct materials (150,000 pounds at $3.5 per pound) 525,000

Direct labor (48,000 direct labor hours at $9.5/hr.) 456,000

Variable manufacturing overhead 490,000

Contribution margin 1,004,000

Less Fixed Costs:

Fixed manufacturing overhead costs 310,000

Fixed selling and administrative costs 160,000

Net operating income $ 534,000

Required:

1. Could you explain to your boss why the company should use the flexible

budget income statement in the variance analysis? Your explanation should

not be more than 1/2 page double spaced with a 12 font size. (15 points)

3

2. Prepare a detailed income statement variance analysis using the contribution

approach income statement (i.e., variable costing basis) for the year (i.e.,

compare the actual income statement with the flexible budget income

statement and compare the flexible budget income statement with the planning

budget income statement). Show all the revenue, spending, and activity

variances appearing in the income statement analysis. A template for

answering this question is given below. All variances should be marked with

either an F for favorable or U for unfavorable. (35 points)

Larcker Variance Case Solution Template

Actual

Revenue &

Spending Flexible Activity Planning

Results Variances Budget Variances Budget

Sales $$$ $$$ $$$ $$$ $$$

Less V.C.

DM $$$ $$$ $$$ $$$ $$$

DL $$$ $$$ $$$ $$$ $$$

V-OH $$$ $$$ $$$ $$$ $$$

CM $$$ $$$ $$$ $$$ $$$

Less FC

Manufacturing $$$ $$$ $$$ $$$ $$$

Sell & Admin $$$ $$$ $$$ $$$ $$$

NOI $$$ $$$ $$$ $$$ $$$

3. Prepare a very detailed manufacturing cost variance analysis (e.g., calculate

the material price variance and quantity variance; the labor rate variance and

efficiency variance; the variable overhead rate variance and efficiency

variance; and the fixed manufacturing overhead budget variance and volume

variance). All variances should be marked with either an F for favorable or

U for unfavorable. Show your calculations. (40 points)

4. Could you reconcile spending variances in Part 2 with manufacturing cost

variances in Part 3? In other words, for each category of manufacturing costs,

show the relationship between the variances in Part 2 with those in Part 3.

Excluding your quantitative analysis if any, your explanation should not

be more than 1/3 page double spaced with a 12 font size. (10 points)

I JUST NEED NUMBER 4!!