\Oakly Variance Case

ACBU 2223

Fall 2019

Instructions for Students

Students can work by themselves or in teams of up to four persons, all from the same class. Students should not discuss the case with anyone except their teammates (if any). Students should not discuss the case with anyone except their teammates. The solution to all questions must be typed and submitted at the beginning of class on the Due date. Calculations should be rounded off to two decimal points if necessary.

Oakly Variance Case

Oakly Inc. manufactures a single product, XR2. Oakly uses budgets and standards in its planning and control functions. Oakly 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 (master) budget income statement, the $11.48 budgeted material cost per unit of XR2 would be used in the calculation.

Exhibit A

Budgeted (Standard) Variable Costs Per Unit of XR2

Raw material: 4.1 pounds at $2.80 per pound

$11.48

Direct labor: 1.2 direct labor hours at $24.00 per hour

28.80

Variable overhead: 1.2 direct labor hours at $10.80 per hour

12.96

Total variable budgeted (standard) cost per XR2

$53.24

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The standards for fixed manufacturing overhead costs are: 1.2 direct labor hours at $14.00 per hour. The standard fixed manufacturing overhead rate per hour is calculated based on a denominator level of activity of 45,000 direct labor hours.

The planning budget income statement is based on the expectation of selling 38,000 units of XR2. The budgeted sales price is $76.00 per unit, and total budgeted fixed selling and administrative costs are $186,500. There are no variable selling and administrative costs in this firm.

The company actually produced and sold 36,000 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.

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

Exhibit B

_______________________________________________________________

Oakly Inc.

Actual Income Statement

Sales:

36,000 units at $78.00

$2,808,000

Less Variable Costs:

Direct materials

436,500

Direct labor

1,040,250

Variable manufacturing overhead

__482,000

Contribution margin

849,250

Less Fixed Costs:

Fixed manufacturing overhead costs

625,400

Fixed selling and administrative costs

175,000

Net operating income

$ 48,850

______________________________________________________________

Actual production data and actual costs for the year are given in Exhibit C.

Exhibit C

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Direct materials purchased and used:

150,000 pounds at $2.91 per pound

Direct labor:

43,800 direct labor hours at $23.75/hr.

Variable overhead costs:

$482,000

Fixed overhead costs:

$625,400

Production

36,000 units

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Required: The solution to this case must be typed.

1. Create a detailed income statement variance analysis using the contribution approach income statement (i.e., variable costing basis) for the year (i.e., compare the planning budget income statement with the flexible budget income statement and compare the flexible budget income statement with the actual income statement). Show all the activity, revenue, and spending 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

2. Create 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.