Accounting Chapter 8

Timberlake Company planned for a production and sales volume of 12,000 units. However, the company actually makes and sells 13,000 units. Per Unit Standards - $65 What was the sales volume variance?

Sales volume variance = Static budget (based on planned volume) − Flexible budget (based on actual volume) Sales volume variance = (12,000 x 65) $780,000 − (13,000 x 65) $845,000 = $65,000 favorable Since the actual volume was greater than the planned volume, the variance is favorable.

Favorable Variances

1) When standard costs are more than actual costs 2) When expected sales are less than actual sales 3) When actual sales are equal to expected sales

Income statement format for a Flexible Budget

Sales - Variable costs = Contribution Margin - Fixed Costs = Net Income

The Boyle Company estimated that April sales would be 150,000 units with an average selling price of $6.00. Actual sales for April were 149,000 units, and average selling price was $6.12. The sales volume variance was:

Sales Volume Variance = Static Budget (planned volume) - Flexible Budget (actual volume) (150,000 x 6) - (149,000 x 6) = 900,000 - 894,000 = $6,000 Unfavorable because Actual < Planned

True or False: If the master budget prepared at a volume level of 20,000 units includes factory rent of $40,000, a flexible budget based on a volume of 21,000 units would include factory rent of $40,000.

TRUE - Fixed costs are the same at all levels of activity because, by definition, they are not affected by changes in volume.

True or False: Hurst Company's standard variable materials cost per unit was $8. The actual materials cost per unit on production of 10,000 units was $8.22. Based on this information, Hurst Company incurred an unfavorable variable materials price variance of $2,200.

TRUE - Price variance = (Actual price − Standard price) × Actual quantity Price variance = ($8.22 per unit − $8.00 per unit) × 10,000 units = $2,200 Since the actual price was greater than the standard price, the variance is unfavorable.

The resources used in the manufacturing process are frequently called:

Inputs

Variable General, selling, and administrative costs...

CAN have price variances and usage variances and cost variances

The Russell Company provides the following standard cost data per unit of product: Direct material (3 gallons @ $6 per gallon) $18.00 Direct labor (2 hours @ $10 per hour) $20.00 During the period, the company produced and sold 22,000 units, incurring the following costs: Direct material 68,000 gallons @ $5.90 per gallon Direct labor 45,500 hours @ $9.75 per hour The direct labor usage variance was:

Direct Labor Usage Variance = (Actual Quantity - Standard Quantity) x Standard Price (45,500 hours - (22,000 units x 2 hours) x $10 per hour = 45,500 - 44,000 x $10 = $15,000 Unfavorable because Actual > Standard

True or False: If the master budget prepared at a volume level of 10,000 units includes direct labor of $10,000, a flexible budget based on a volume of 11,000 units would include direct labor of $10,000.

FALSE - Standard cost per unit = Standard cost ÷ Expected volume Standard direct material cost per unit = $10,000 ÷ 10,000 units = $1.00 per unit Flexible budget = Standard cost per unit × Actual volume Flexible budget at a level of 11,000 units = $1.00 per unit × 11,000 units = $11,000

True or False: In most cases, the production manager should be held accountable for fixed cost volume variances.

FALSE - The fixed cost volume variance is a measure of facility utilization. The company will suffer an unfavorable variance when it does not utilize its facilities to make and sell the number of units of product it had planned to make and sell. A favorable fixed cost volume variance suggests that a company utilized its facilities to make and sell more than the planned volume of activity. As a result, the production manager should not be held accountable for these variances.

True or False: Two budgeting games sometimes played by employees are building in budget slack and making the numbers.

FALSE - When marketing managers refer to making the numbers, they usually mean reaching the sales volume in the static (master) budget. This is not an example of budget gamesmanship.

True or False: When a comparison of static and flexible budgets shows an unfavorable sales volume variance, the variable cost volume variances will also be unfavorable.

FALSE - When the static is compared to the flexible budget, a decrease in sales volume will produce an unfavorable sales volume variance. However, since the variable costs in the flexible budget will be lower than the variable costs in the static budget, the variable cost volume variances will be favorable.

Abbot Company spent less than expected for materials and more than expected for labor. Select the incorrect statement from the following. - You can always expect unfavorable labor variances if you have favorable material variances. - In order to facilitate cost control, it will be necessary to analyze the price and quantity of each resource used in production. - It cannot be determined from the information provided whether employees were paid higher wages or if they worked more hours. - It cannot be determined from the information provided whether the company paid a lower purchase price for materials or if workers used less materials.

INCORRECT - You can always expect unfavorable labor variances if you have favorable material variances - A favorable materials variance could mean purchasing agents were shrewd in negotiating price concessions, discounts, or delivery terms and therefore reduced the price the company paid for materials. Similarly, production employees may have used materials efficiently, using less than expected. - The unfavorable labor variance could mean managers failed to control employee wages or motivate employees to work hard. Using substandard materials could have required additional labor in the production process, which would explain the unfavorable labor variance; however, this is only one possible explanation.

Item - Standard - Actual Sales volume 100,000 units 96,000 units Sales price $4 per unit $3.90 per unit Material usage 40,000 gallons 42,000 gallons Labor price 12.50 per hour 12.45 per hour All of the following variances are unfavorable except?

Labor Price because actual price per hour is less than the standard

The standard amount of materials required to make one unit of Product Q is 4 pounds. Tusa's static budget showed a planned production of 3,800 units. During the period, the company actually produced 4,100 units of product. The actual amount of materials used averaged 3.9 pounds per unit. The standard price of material is $1 per pound. Based on this information, the materials usage variance was:

Materials Usage Variance = (Actual Quantity - Standard Quantity) x Standard Price (4,100 x 3.9) - (4,100 x 4) x $1.00 Per pound = $15,990 - $16,400 x 1.00 = $410 Favorable because Actual > Standard

The Landrum Company provides the following standard cost data per unit of product: Variable overhead$8.00 Landrum anticipated that they would produce and sell 24,000 units. During the period, the company produced and sold 25,000 units, incurring $210,000 of variable overhead costs. The variable overhead flexible budget variance was:

Overhead Flexible Budget Variance = (Actual cost per unit - Standard cost per unit) x Actual Units ($210,000 - (8.00 x 25,000)) = 210,000 - 200,000 = $10,000 unfavorable because actual > flexible budget

Volume variances are computed for:

Variable manufacturing and selling admin costs Variances occur only because the budgets are created using different volumes of activity. Since total fixed cost is not affected by the level of activity, there will be no fixed cost variances associated with static versus flexible budgets.

Making the numbers

achieving sales volume in the Master Budget

Static Budget is referred to as a:

budget prepared at a single volume of activity