Problem 1: Comprehensive Variance Analysis

ABC Company manufactures and sells trash bags. ABC Company mostly operates in the South East of the United States, with a major presence in Florida. For the year 2016, ABC Company prepared its master budget on the basis of 10,000 boxes of bags produced and sold. Due to Tropical Storm Matthew at the end of the summer of 2016, ABC Company had to ramp up production to meet the sudden demand for trash bags needed for the cleanup efforts. Accordingly, ABC Company produced and sold 12,000 boxes of bags (within the relevant range of operations). ABC Company uses process costing and started the year with no units in beginning inventory. At the end of the year, ending inventory is equal to zero. Direct materials are added at the beginning of the process. ABC Company applies manufacturing overhead costs using machine hours as the cost driver.

Table 1 provides XYZ Companys static budget and actual results using a contribution margin income statement.

Table 1

2

	Actual Results (1)
Units Sold	12,000
Revenues	$ 210,000
VariableCosts
D i r e c t Ma t e r i a l s	29,750
D i r e c t Ma n u f a c t u r i n g L a b o r	16,875
VariableManufacturingOverhead	42,500
Total VariableCosts	$ 89,125
Total ContributionMargin	$ 120,875
FixedManufacturingOverhead	40,000
OperatingIncome	$ 80,875

To support the preparation of the static budget, the following budgeted (standards) information has been used.

Table 2:

Standards

Selling price per box		$ 15.00	per box
Direct Materials cost per unit of product		$ 2.00	per unit
Standard quantity of direct material per unit of product		0.5	Lbs
Standard cost per unit of direct materials		$4	per Lbs
Direct Manufacturing Labor cost per unit of product		$ 1.00	per unit
Standard quantity of direct labor per unit of product		0.05	hour
Standard cost per unit of direct labor		$ 20.00	per hour
Variable Manufacturing Overhead per unit		$ 2.50	per unit
Budgeted machine hours allowed per unit of product		0.25	machine hour
Budgeted variable overhead cost per unit of input		$ 10.00	per machine hour
Fixed Manufacturing Overhead per unit		$ 3.75	per unit
Budgeted machine hours allowed per unit of product		0.25	machine hour
Budgeted fixed overhead cost per unit of input		$ 15.00	per machine hour
Budgeted total fixed manufacturing overhead		$ 37,500.00

Underlying the actual results, are the following details:

Table 3:

ACTUALS
Actual. quantity of direct materials purchased and used	8,500 pounds
Actual cost per unit of direct materials	$3.50 per pounds
Actual quantity of direct labor hours used	675 hours
Actual cost per hour of direct labor	$25.00 per hour
Actual Variable overhead cost	$42,500.00
Actual fixed overhead cost	$40,000.00
Actual Machine hours used	4,000 Machine Hours
Actual Production	15,000 units

Requirements:

Prepare the static budgeted income statement for ABC Company.

Prepare a flexible budgeted income statement for ABC Company.

Perform a comprehensive variance analysis for ABC Company that you will use to explain why

the company performed better than expected. To do so, you can compute the following variances:

a. Static budget variance (Actual operating income versus static budget operating income) b. Sales volume variance (Flexible budget operating income versus static budget operating

income) c. Flexible budget variance (Actual operating income versus static budget operating

income) d. Selling price variance (Actual sales versus flexible budget sales) e. Direct materials price variance f. Direct materials efficiency variance g. Direct labor price variance h. Direct labor efficiency variance i. Variable manufacturing overhead spending variance j. Variable manufacturing overhead efficiency variance k. Fixed manufacturing overhead spending variance l. Fixed manufacturing overhead volume variance

On the basis of your findings, write a memo to top management presenting the problem (the variances), your findings and analyses (explain the variances, their causes, etc...), recommendations, and conclusion.