Smith Variance Case

Smith Inc. manufactures a single product, ABG. Smith uses budgets and standards in its planning and control functions. Smith 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 $10 budgeted material cost per unit of ABG would be used in the calculation.

Exhibit A

Budgeted (Standard) Variable Costs Per Unit of ABG

Raw material: 2 pounds at $5 per pound $10

Direct labor: 1 direct labor hour at $12 per hour 12

Variable overhead: 1 direct labor hour at $8 per hour 8

Total variable budgeted (standard) cost per ABG 30

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The standards for fixed manufacturing overhead costs are: 1 direct labor hour at $7.5 per hour. The standard fixed manufacturing overhead cost per hour is calculated based on a denominator level of activity of 50,000 direct labor hours.

The planning budget income statement is based on the expectation of selling 50,000 units of ABG. The budgeted sales price is $48 per unit, and total budgeted fixed selling and administrative costs are $125,000. There are no variable selling and administrative costs in this firm.

The company actually produced and sold 42,000 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

Smith Inc.

Actual Income Statement

Sales:

42,000 units produced and sold at $50 $2,100,000

Less Variable Costs:

Direct materials (75,000 pounds at $5.25 per pound) 393,750

Direct labor (40,000 direct labor hours at $12.75/hr.) 510,000

Variable manufacturing overhead 360,000

Contribution margin 836,250

Less Fixed Costs:

Fixed manufacturing overhead costs 370,000

Fixed selling and administrative costs 140,000

Net operating income $ 326,250

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Required:

1. 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.

Smith Variance Case Solution Template for Part 1

Actual Revenue & Spending Flexible Activity Planning

result variances budgets Variances Budget

Sales

Less V.C.

DM

DL

V-OH

CM

Less FC

Manufacturing

Sell & Admin

NOI