Question 1

Brabham enterprises manufactures tires for the formula 1 motor racing circuit. For august 2014, it budgeted
to manufacture and sell 3,000 tires at a variable cost of $74 per tire and total fixed costs of $54,000. The
budgeted selling price was $110 per tire. Actual results in August 2014 were 2,800 tires manufactured and
sold at a selling price of $112 per tire. The actual total variable costs were $229,600, and the actual total
fixed costs were $50,000.
1. Prepare a performance report including the actual results, the flexible budget, the static budget as well as
the sales/volume variance, the flexible budget variance and the static budget variance.
2. Comment on the results in requirement 1.

Variance Analysis for Brabham Enterprises for August 2012

Actual
Results
(1)
Units
sold

(tires)

Revenues

2,800g

FlexibleBudget
Variances
(2) = (1)
(3)
0

$ 5,600 F

229,600d

22,400 U

Contribution
margin

84,000

16,800 U

Fixed costs

50,000g

Operating
income

$ 34,000

$12,800 U

200
U

(5)
3,000g

$22,000
U

$330,000
c

207,200
e

14,800
F

222,000f

54,000g
$
46,800

$ 7,200 U

Total flexible-budget variance

$20,000 U
Total static-budget variance
a $112 2,800 = $313,600
b $110 2,800 = $308,000
c $110 3,000 = $330,000
d Given. Unit variable cost = $229,600 2,800 = $82 per tire
e $74 2,800 = $207,200

(4) = (3)
(5)

Static
Budget

$308,00
0b

100,800

4,000 F
$12,800 U

(3)
2,800

$313,600
a

Variable costs

Flexibl
e
Budget

SalesVolume
Variances

7,200 U
0
$ 7,200
U

108,000

54,000g
$ 54,000

f $74 3,000 = $222,000

g Given

2.

The key information items are:

Actual
Units

Budgeted

2,800

3,000

Unit selling price

112

110

Unit variable cost

82

74

Fixed costs

$50,000

$54,000

The total static-budget variance in operating income is $20,000 U. There is both an unfavorable total
flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200).
The unfavorable sales-volume variance arises solely because actual units manufactured and
sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance of
$12,800 in operating income is due primarily to the $8 increase in unit variable costs. This increase
in unit variable costs is only partially offset by the $2 increase in unit selling price and the $4,000
decrease in fixed costs.

Question 2
Bank Management Printers Inc. produces luxury checkbooks. The companys operating budget for September
2014 included these data:
Number of checkbooks
Selling price per book
Variable cost per book
Fixed costs for the month

15,000
$20
$8
$145,000

The actual results for September 2014 were as follows:

Number of checkbooks produced and sold
Average selling price per book
Variable cost per book
Fixed costs for the month

12,000
$21
$7
$150,000

The executive vice president of the company observed that the operating income for September was much
lower than anticipated, despite a higher-than-budgeted selling price and lower-than-budgeted variable cost
per unit.
1. Prepare a static-budged-based variance analysis for the September performance.
2. Prepare a flexible-budged-based variance analysis of the September performance.
3. Why might Bank Management find the flexible-budget-based variance analysis more informative than the
static-budget-based variance analysis? Explain your answer.

1.

Variance Analysis for Bank Management Printers for September 2012

Level 1 Analysis
Actual
Results

StaticBudget

Static
Budget

Variances

(1)

(3)

(2) = (1)
(3)
Units sold
Revenue

12,000
15,000

3,000 U

$252,000
a

$48,000 U

$300,000c

84,000d

36,000 F

120,000f

168,000

12,000 U

180,000

150,000

5,000 U

145,000

$ 18,000

$17,000 U

$ 35,000

Variable costs
Contribution
margin
Fixed costs
Operating
income
$17,000 U
Total static-budget variance

2.

Level 2 Analysis

Flexible-

Units sold

Actual

Budget

Flexible

Results

Variances

Budget

(1)

(2) = (1)
(3)

(3)

12,000

Revenue

$252,000
a

Variable costs

84,000d

Contribution
margin

168,000

Fixed costs

150,000

Operating
income

Sales

$ 18,000

Volume

Static

Variances Budget
(4) = (3)
(5)

12,000

$12,000 F

$240,00
0b

3,000 U

(5)

15,000

$60,000 U

$300,00
0c

12,000 F

96,000e

24,000 F

120,000
f

24,000 F

144,000

36,000 U

180,000

5,000 U 145,000
$19,000 F

$
(1,000)

$19,000 F
Total flexible-budget

0
$36,000 U

145,000
$
35,000

$36,000 U
Total sales-volume

variance
$17,000 U
Total static-budget variance
a 12,000 $21 = $252,000 d 12,000 $7 =

$ 84,000

b 12,000 $20 = $240,000 e 12,000 $8 =

$ 96,000

c 15,000 $20 = $300,000 f 15,000 $8 =

$120,000

3.
Level 2 analysis breaks down the static-budget variance into a flexible-budget variance and a
sales-volume variance. The primary reason for the static-budget variance being unfavorable
($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual 12,000. One
explanation for this reduction is the increase in selling price from a budgeted $20 to an actual $21.
Operating management was able to reduce variable costs by $12,000 relative to the flexible budget.
This reduction could be a sign of efficient management. Alternatively, it could be due to using lower
quality materials (which in turn adversely affected unit volume).

Question 3

Luster Inc., produces the basic fillings used in many popular frozen desserts and treats. Luster carries no
inventory from one month to the next. The ice-cream product groups results for June 2014 were as
follows:

1. Calculate the static-budget variance in units, revenues, variable manufacturing costs, and
contribution margin. What percentage is each static budget variance relative to its static budget amount?
2. Break down each static-budget variance into a flexible-budget variance and a sales-volume variance.
3. Calculate the selling-price variance.
4. Assume the role of management accountant at Luster. How would you present the results to Sam Adler?
Should he be concerned? If so, why?

3.
The selling price variance, caused solely by the difference in actual and budgeted selling price,
is the flexible-budget variance in revenues = $17,750 U.

4. Budgeted market share = 345,000 1,150,000 = 30%

Actual market share = 355,000 1,109,375 = 32%

Static Budget:
Actual Market Size

Actual Market Size

Actual Market
Share

Budgeted Market
Share

Budgeted
Contribution
Margin per Unit

Budgeted
Contribution
Margin per Unit

(1,109,375 32%
$1.95)

(1,109,375 30%
$1.95)

(1,150,000 30%
$1.95)

$648,984

$672,750

$692,250

Budgeted Market
Size
Budgeted Market
Share
Budgeted
Contribution
Margin per Unit

$43,266 F

$23,766 U

Market-share variance

Market-size variance
$19,500 F

Sales-volume variance

The flexible-budget variances show that for the actual sales volume of 355,000 pounds, selling prices
were lower and costs per pound were higher. The favorable sales volume variance in revenues
(because more pounds of ice cream were sold than budgeted) helped offset the unfavorable variable
cost variance and shored up the results in June 2012. Levine should be more concerned because the
small static-budget variance in contribution margin of $16,000 U is actually made up of a favorable
sales-volume variance in contribution margin of $19,500, an unfavorable selling-price variance of
$17,750 and an unfavorable variable manufacturing costs variance of $17,750. Levine should
analyze why each of these variances occurred and the relationships among them. Could the
efficiency of variable manufacturing costs be improved? The sales volume appears to have
increased due to the lower sales price or a better quality product since the overall total market size
decreased. The company increased its market share even in the face of an overall decrease in the
market for ice-cream products. This could be due to increased efforts in marketing or actions by
competitors that are driving more customers to the company.

Question 4
Peterson Foods manufactures pumpkin scones. For January 2014, it budgeted to purchase and use 15,000
pounds of pumpkin at $0.89 a pound. Actual usage and purchase for January 2014 were 16,000 pounds at
$0.82 a pound. Peterson budgeted for 60,000 pumpkin scones. Actual output was 60,800 pumpkin scones.
1. Compute the flexible-budget variance.
2. Compute the price and efficiency variances.
3. Comment on the results for requirements 1 and 2 and provide a possible explanation for them.

1.

The key information items are:

Output units (scones)

Input units
pumpkin)

(pounds

of

Actual

Budgeted

60,800

60,000

16,000
$ 0.82

15,000
$ 0.89

Cost per input unit

Peterson budgets to obtain 4 pumpkin scones from each pound of pumpkin.

The flexible-budget variance is $408 F.

FlexibleActual

Budget

Results

Variance

(1)

(2) = (1)
(3)

Flexibl
e
Budget
(3)

SalesVolume
Variance
(4) = (3)
(5)

Static
Budge
t
(5)

$13,120
a

Pumpkin
costs

$408 F

$13,528
b

$178 U

$13,35
0c

16,000 $0.82 = $13,120

60,800 0.25 $0.89 = $13,528

60,000 0.25 $0.89 = $13,350

Flexible Budget
(Budgeted
Input
Actual Costs
Incurred

Actual Input
Quantity

Actual Output

Actual Price)

Budgeted
Price

Budgeted
Price)

$13,120a

$14,240b

$13,528c

(Actual Input
Quantity
2.

Quantity
Allowed for

$1,120 F

$712 U

Price variance
Efficiency variance
$408 F
Flexible-budget variance
a
b
c

16,000 $0.82 = $13,120

16,000 $0.89 = $14,240
60,800 0.25 $0.89 = $13,528

3.

The favorable flexible-budget variance of $408 has two offsetting components:

(a) favorable price variance of $1,120reflects the $0.82 actual purchase cost being lower than the $0.89 budgeted
purchase cost per pound.
(b) unfavorable efficiency variance of $712reflects the actual materials yield of 3.80 scones per pound of pumpkin
(60,800 16,000 = 3.80) being less than the budgeted yield of 4.00 (60,000 15,000 = 4.00). The company used
more pumpkins (materials) to make the scones than was budgeted.

One explanation may be that Peterson purchased lower quality pumpkins at a lower cost per pound.

Question 5

Sallymay, Inc., designs and manufactures T-shirts. It sells its T-shirts to brand name clothes retailers in lots of
one dozen. Sallymays May 2013 static budget and actual results for direct inputs are as follows:
Static Budget:
Number of T-shirt lots (1 lot = 1 dozen)
Per lot of T-shirts:
Direct materials
Direct manufacturing labor

14 meters at $1.70 per meter = $23.80

1.6 hours at $8.10 per hour = $12.96

Actual results:
Number of T-shirts lots sold
Total direct inputs:
Direct materials
Direct manufacturing labor

400

450
6,840 meters at $1.95 per meter = $13,338
675 hours at $8.20 per hour = $5,535

A new type of material was purchased in May 2013. This led to faster cutting and sewing, but the workers
used more material than usual as they learned to work with it. For now the standards are fine.
1. Calculate the direct materials and direct manufacturing labor price and efficiency variances in May 2013.
What is the total flexible-budget variance for both inputs (direct materials and direct manufacturing labor)
combined? What percentage is this variance of the total cost of direct materials and direct manufacturing
labor in the flexible budget?
2. Sally King, the CEO, is concerned about the input variances. But she likes the quality and the feel of the
new material and agrees to use it for one more year. In May 2014, Sallymay again produces
450 lots of T-shirts. Relative to May 2013, 2% less direct material is used, direct material price is down 5%,
and 2% less direct manufacturing labor is used. Labor price has remained the same as in May 2013. Calculate
the direct materials and direct manufacturing labor price and efficiency variances in May 2014. What is the
total flexible-budget variance for both inputs (direct materials and direct manufacturing labor) combined?
What percentage is this variance of the total cost of direct materials and direct manufacturing labor in the
flexible budget?
3. Comment on the May 2014 results. Would you continue the experiment of using the new material?

1.
Actual
Quantity

May 2011

Units

Actual

Price

Results

Variance

(1)

(2) = (1)
(3)

Budgeted
Price

Efficiency
Variance

Flexible
Budget

(3)

(4) = (3)
(5)

(5)

550

550

Direct materials

$12,705.
00

$1,815.
00 U

$10,890.00

$990.00 U

$9,900.0
0b

Direct labor

$
8,464.50

$
104.50 U

$ 8,360.00c

$440.00 F

$8,800.0
0d

Total price variance

Total efficiency
variance

$1,919.
50 U
$550.00 U

7,260 meters
b

550 lots

$1.50 per meter = $10,890

12 meters per lot

1,045 hours

550 lots

$1.50 per meter = $9,900

$8.00 per hour = $8,360

2 hours per lot

$8 per hour = $8,800

Total flexible-budget variance for both inputs = $1,919.50U + $550U =

$2,469.50U
Total flexible-budget cost of direct materials and direct labor = $9,900 +
$8,800 = $18,700
Total flexible-budget variance as % of total flexible-budget costs =

$2,469.50 $18,700 = 13.21%

2.
Actual
Quantity
May
2012

Price

Actual
Results

Variance

(1)

(2) = (1)
(3)

Units

Efficiency

Budgete
d Price
(3)

Variance

Flexible
Budget

(4) = (3)
(5)

(5)

550

550

$11,828.3
6a

$1,156.1
$10,672.2
6 U 0b

$772.2
0 U

$9,900.00

Direct materials

$
$
102.41 U 8,192.80e

$607.2
0 F

$8,800.00

Direct manuf. labor

$
8,295.21d

Total efficiency
variance

$165.0
0 U

Actual dir. mat. cost, May 2012 = Actual dir. mat. cost, May 2011

$12,705

$1,258.5
7 U

Total price variance

0.98

0.98

0.95 =

0.95 = $11.828.36

Alternatively, actual dir. mat. cost, May 2012

= (Actual dir. mat. quantity used in May 2011
May 2011

= 7,114.80

0.98)

(Actual dir. mat. price in

0.95)

= (7,260 meters

0.98)

($1.75/meter

0.95)

$1.6625 = $11,828.36

(7,260 meters

0.98)

$1.50 per meter = $10,672.20

Unchanged from 2011.

Actual dir. labor cost, May 2012 = Actual dir. manuf. cost May 2011

$8,464.50

0.98 =

0.98 = $8,295.21

Alternatively, actual dir. labor cost, May 2012

= (Actual dir. manuf. labor quantity used in May 2011
price in 2011

0.98)

Actual dir. labor

= (1,045 hours

= 1,024.10 hours
e

(1,045 hours

0.98)

0.98)

$8.10 per hour

$8.10 per hour = $8,295.21

$8.00 per hour = $8,192.80

Total flexible-budget variance for both inputs = $1,258.57U + $165U =

$1,423.57U
Total flexible-budget cost of direct materials and direct labor = $9,900 +
$8,800 = $18,700
Total flexible-budget variance as % of total flexible-budget costs =

$1,423.57 $18,700 = 7.61%

3.
Efficiencies have improved in the direction indicated by the
production managerbut, it is unclear whether they are a trend or a onetime occurrence. Also, overall, variances are still 7.6% of flexible input
budget. GloriaDee should continue to use the new material, especially in
light of its superior quality and feel, but it may want to keep the following
points in mind:

The new material costs substantially more than the old ($1.75 in
2011 and $1.6625 in 2012 vs. $1.50 per meter). Its price is
unlikely to come down even more within the coming year.
Standard material price should be re-examined and possibly
changed.
GloriaDee should continue to work to reduce direct materials and
direct manufacturing labor content. The reductions from May
2011 to May 2012 are a good development and should be
encouraged.

Question 6

Milan statuary manufactures bust statues of famous historical figures. All statues
are the same size. Each unit requires the same amount of resources. The
following information is from the static budget for 2014:
Expected production and sales 6,100 units
Expected selling price per unit $700
Total fixed costs $1,350,000
Standard quantities, standard prices, and standard unit costs follow for direct
materials and direct manufacturing labor:

During 2014, actual number of units produced and sold was 5,100, at an average
selling price of $730.
Actual cost of direct materials used was $1,149,400, based on 70,000 pounds
purchased at $16.42 per pound. Direct manufacturing labor-hours actually used
were 17,000 at the rate of $33.70 per hour. As a result, actual direct
manufacturing labor cost were $572,900. Actual fixed costs were $1,200,000.
There were no beginning or ending inventories.
1. Calculate the sales-volume variance and flexible-budget variance for operating
income.
2. Compute price and efficiency variances for direct materials and direct
manufacturing labor.

1. Sales volume variance.

Budgeted contribution margin per unit = ($3,300,000 220,000) (1
64%) = $5.40 per unit

Sales volume variance = Budgeted contribution margin per unit

(Actual units sold budgeted units sold)
= $5.40 (230,550 220,000) = $56,970 F

2. Market share and market size variances

Budgeted market share = 220,000 4,400,000 = 5%
Actual market share = 230,550 4,350,000 = 5.30%

Static Budget:
Actual Market Size

Actual Market Size

Actual Market
Share

Budgeted Market
Share

Budgeted
Contribution
Margin per Unit

Budgeted
Contribution
Margin per Unit

(4,350,000 5.3%
$5.40)

(4,350,000 5%
$5.40)

(4,400,000 5%
$5.40

$1,174,500

$1,188,000

$1,244,970

Budgeted Market
Size
Budgeted Market
Share
Budgeted
Contribution
Margin per Unit

$70,470 F

$13,500 U

Market-share variance

Market-size variance

$56,970 F
Sales-volume variance

3. The market share variance is favorable indicating that the company

increased its percentage of the market. Since the total market decreased,
this could be due to providing a higher quality product or more after-sale
services than competitors, a decrease in sales price, or due to negative
actions by competitors.

Question 7
Esquire Clothing is a manufacturer of designer suits. The cost of each suit is the
sum of three variable costs (direct material costs, direct manufacturing labor
costs, and manufacturing overhead costs) and one fixed-cost category
(manufacturing overhead costs). Variable manufacturing overhead cost is
allocated to each suit on the basis of budgeted direct manufacturing labor-hours
per suit. For June 2014, each suit is budgeted to take 4 labor hours. Budgeted
variable manufacturing overhead cost per labor hour is $12. The budgeted
number of suits to be manufactured in June 2014 is 1,040.
Actual variable overhead costs in June 2014 were $52,164 for 1,080 suits started
and completed. There were no beginning or ending inventories of suits. Actual
direct manufacturing labor hour for June were 4,536.
1. Compute the flexible-budget variance, the price (spending) variance, and the
efficiency variance for the variable manufacturing overhead.
2. Comment on the results.

1.

Variable Manufacturing Overhead Variance Analysis for Esquire Clothing for June 2012

Actual Costs
Incurred
Actual Input
Quantity

Actual Input
Quantity

Flexible Budget:

Allocated:

Budgeted Input

Budgeted Input

Quantity Allowed

Quantity Allowed

for Actual Output

for Actual Output

Budgeted Rate

Budgeted Rate

Actual Rate

Budgeted
Rate

(1)

(2)

(3)

(4)

(4,536
$11.50)

(4,536 $12)

(4 1,080 $12)

(4 1,080 $12)

$54,432

$51,840

$51,840

$52,164

$2,268 F

$2,592 U

Spending

Efficiency

Never a

$324 U
Flexible-budget variance

Never a

2.
Esquire had a favorable spending variance of $2,268 because the actual variable
overhead rate was $11.50 per direct manufacturing labor-hour versus $12 budgeted. It had an
unfavorable efficiency variance of $2,592 U because each suit averaged 4.2 labor-hours
(4,536 hours 1,080 suits) versus 4.0 budgeted labor-hours.
Question 8

The French Bread Company bakes baguettes for distribution to upscale grocery
stores. The company has two direct cost categories: direct materials and direct
manufacturing labor. Variable manufacturing overhead is allocated to products
on the basis of standard direct manufacturing labor-hours. Following is some
budget data for the French Bread Company:
Direct manufacturing labor use
0.02 hours per baguette
Variable manufacturing overhead
$10 per direct manufacturing labor-hour
The French Bread Company provides the following additional data for the year
ended December 31, 2014.
Planned (budgeted) output
3,200,000 baguettes
Actual production
2,800,000 baguettes
Direct manufacturing labor
50,400 hours
Actual variable manufacturing overhead
$680,400

1. What is the denominator level used for allocating variable manufacturing

overhead? (That is, for how many direct manufacturing labor-hours is French
Bread budgeting?).
2. Calculate the flexible-budget variance, price variance and efficiency variances
for variable manufacturing overhead.
3. Discuss the variances you have calculated and give possible explanations for
them.

1. Denominator level = (3,200,000 0.02 hours) = 64,000 hours

2.

1. Output units (baguettes)

2. Direct manufacturing labor-hours
3. Labor-hours per output unit (2
1)

Actual
Results

Flexible
Budget
Amounts

2,800,000

2,800,000

50,400

56,000a

0.018

0.020

$680,400

$560,000

5. Variable MOH per labor-hour (4

2)

$13.50

$10

6. Variable MOH per output unit (4

1)

$0.243

$0.200

4. Variable manuf. overhead (MOH)

costs

2,800,000

0.020= 56,000 hours

Variable Manufacturing Overhead Variance Analysis for French Bread

Company for 2012

Allocated:

Flexible Budget:
Budgeted Input
Quantity
Allowed

Actual Costs
Incurred

Budgeted Input
Quantity
Allowed

Actual Input
Quantity

for Actual
Output

for Actual
Output

Actual Rate

Budgeted
Rate

Budgeted
Rate

Budgeted
Rate

(1)

(2)

(3)

(4)

(50,400
$13.50)

(50,400 $10)

(56,000 $10)

(56,000 $10)

$504,000

$560,000

$560,000

Actual Input
Quantity

$680,400
$176,400 U
Spending

$56,000 F
Efficiency

Never a

$120,400 U
Flexible-budget variance

Never a

3. Spending variance of $176,400 U. It is unfavorable because variable

manufacturing overhead was 35% higher than planned. A possible
explanation could be an increase in energy rates relative to the rate per
standard labor-hour assumed in the flexible budget.
Efficiency variance of $56,000 F. It is favorable because the actual number of direct
manufacturing labor-hours required was lower than the number of hours in the flexible
budget. Labor was more efficient in producing the baguettes than management had
anticipated in the budget. This could occur because of improved morale in the company,
which could result from an increase in wages or an improvement in the compensation
scheme.
Flexible-budget variance of $120,400 U. It is unfavorable because the favorable
efficiency variance was not large enough to compensate for the large unfavorable spending
variance.

Question 9
The French Bread Company also allocates fixed manufacturing overhead to
products on the basis of standard direct manufacturing labor hours. For 2014,
fixed manufacturing overhead was budgeted at $4 per labor hour. Actual fixed
manufacturing overhead incurred during the year was $272,000.
1. Prepare a variance analysis of fixed manufacturing overhead cost.
2. Is fixed overhead underallocated or overallocated? By what amount?
3. Comment on your results. Discuss the variances and explain what may be
driving them?

1.

Budgeted standard direct manufacturing labor used = 0.02 per

baguette
Budgeted output = 3,200,000 baguettes
Budgeted standard direct manufacturing labor-hours
= 3,200,000 0.02
= 64,000 hours
Budgeted fixed manufacturing overhead costs
= 64,000 $4.00 per hour
= $256,000
Actual output

= 2,800,000 baguettes

Allocated fixed manufacturing overhead

= 2,800,000 0.02 $4
= $224,000

Fixed Manufacturing Overhead Variance Analysis for French Bread

Company for 2012

Flexible Budget:

Same Budgeted
Lump Sum

Actual
Costs
Incurred

(as in Static
Budget)
Regardless of

(1)

Allocated:

Same Budgeted

Budgeted Input
Quantity Allowed

Lump Sum
(as in Static
Budget)
Regardless of

for Actual Output

Budgeted Rate
(4)

Output Level

Output Level

(3)

(2)

$272,000

$256,000

$256,000

(2,800,000 0.02
$4)
$224,000

$32,000 U

$16,000 U
Spending

Never a variance

Production-volume

$16,000
$32,000
U U
Production-volume
Flexible-budget
variance
$48,000 U variance
Underallocated fixed overhead
(Total fixed overhead variance)

2. The fixed manufacturing overhead is underallocated by $48,000.

3. The production-volume variance of $32,000U captures the difference
between the budgeted 3,200,0000 baguettes and the lower actual
2,800,000 baguettes producedthe fixed cost capacity not used. The
spending variance of $16,000 unfavorable means that the actual
aggregate of fixed costs ($272,000) exceeds the budget amount
($256,000). For example, monthly leasing rates for baguette-making
machines may have increased above those in the budget for 2012.
Question 10

The Principles Corporation is a manufacturer of centrifuges. Fixed and variable

manufacturing overheads are allocated to each centrifuge using budgetedassembly hours. Budgeted assembly time is 2 hours per unit. The following table
shows the budgeted amounts and actual results related to overhead for June
2014.

Prepare an analysis of all variable manufacturing overhead and fixed

manufacturing overhead variances.