10.

47 Variance analysis, material, and labour

The following information is available for Mandalay Company:

Actual:

Materials 12,000 pounds purchased at $2.50 per pound; used

10,500 pounds
Direct Labour 1,800 hours at $12 per hour

Units Produced 500

Standard:

Materials 20 pounds per unit at a price of $2.20 per pound

Direct Labour 4 hours per unit at a wage rate of $10 per hour

Required:
a) Determine the material price variance and material quantity variance
b) Determine the direct labour rate variance and direct labour efficiency variance.
10-47

a.) Because the quantity purchased differs from the quantity used, the material price variance uses the purchased
quantity (PQ) instead of the quantity used (AQ).

Material price variance = (AP – SP) × PQ

= ($2.50 – 2.20) × 12,000
= $3,600 U

Material quantity variance = (AQ – SQ) × SP

= (10,500 – (20 × 500)) × $2.2
= $1,100 U

b.) Direct labour Rate Variance = (AR – SR) × AH

= ($12 – 10) × 1,800
=$3,600 U

Direct labor efficiency variance = (AH – SH) × SR

= (1,800 – (4 × 500)) × $10
= $2,000 F
10.48 Variance analysis, material, and labour

Pharout Company uses a standard cost system. Job 822 is for the manufacturing of 500 units of the product P521.
The company’s standard for one unit of product P521 are as follows
:

Quantity Price

Direct Material 5 ounces $2 per ounce

Direct Labour 2 hours $10 per hour

The job required 2,800 ounces of raw material costing $5,880. An unfavourable labour rate variance of $250 and a
favourable labour efficiency variance of $100 also were determined for this job.

Required:
a) Determine the direct material price variance for job 822 based on the actual quantity of materials used.
b) Determine the direct material quantity variance for job 822.
c) Determine the actual quantity of direct labour hours used on job 822 based on the actual quantity of material
used.
d) Determine the actual labour costs incurred for job 822.
10-48

(a) Direct Material Price Variance = (AP – SP) × PQ

= ($(5,880 ÷2,800) – 2) ×2,800
= $280 U

(b) Direct Material Quantity Variance = (AQ – SQ) × SP

= (2,800 – (5× 500)) ×$2
= $600 U

(c) A favorable labor efficiency variance of $100 for job 822 implies that (AH – 2 × 500) × $10 = –100. Therefore,

100
AH = 1,000 – = 990
10

(d) An unfavorable labor rate variance of $250 for job 822 implies that (AR – 10) × 990 = 250. Therefore,

250
AR = 10 + = $ 10.2525
990

Finally, the actual direct labor costs incurred for Job 822 are:

AR × AH = $10.2525 × 990 = $ 10,150 (rounded)

10.61 Financial budgets: cash inflows

Worthington Company makes cash (20% of total sales), credit card (50% of total sales), and account (30% of total sales)
sales. Credit card sales are collected in the month following the sale, net a 3% credit card fee. This means that if the sale is
$100, the credit card company’s fee is $3, and Worthington receives $97. Account sales are collected as follows: 40% in the
first month following the sale, 50% in the second month following the sale, 8% in the third month following the sale, and
2% never collected.
Prepare a statement showing the cash expected each month from the collections from these sales. The following table
identifies the projected sales for the next year:
Worthington Company
Projected Sales

Month Sales Month Sales

January $12,369,348 July $21,747,839
February 15,936,293 August 14,908,534
March 13,294,309 September 11,984,398
April 19,373,689 October 18,894,535
May 20,957,566 November 21,983,545
June 18,874,717 December 20,408,367
10-61 Worthington Company
Credit Account Sales
Month Revenue Cash Sales Card Sales Total

January 12,369,348 2,473,870 0 0 2,473,870

February 15,936,293 3,187,259 5,999,134 1,484,322 10,670,715
March 13,294,309 2,658,862 7,729,102 3,767,757 14,155,721
April 19,373,689 3,874,738 6,447,740 4,282,625 14,605,103
May 20,957,566 4,191,513 9,396,239 4,701,460 18,289,212
June 18,874,717 3,774,943 10,164,420 5,740,025 19,679,388
July 21,747,839 4,349,568 9,154,238 5,873,569 19,377,375
August 14,908,534 2,981,707 10,547,702 5,943,930 19,473,339
September 11,984,398 2,396,880 7,230,639 5,504,193 15,131,712
October 18,894,535 3,778,907 5,812,433 4,196,356 13,787,696
November 21,983,545 4,396,709 9,163,849 4,422,809 17,983,367
December 20,408,367 4,081,673 10,662,019 5,759,831 20,503,523
10.69 Budget preparation, breakeven point, what-if analysis with multiple products (Adapted from CPA, May 1993)

The following information is provided for the year ending December 31, 2006, pertains to Rust Manufacturing Company’s
1. Rust has no beginning inventory. Production is planned so that it will equal the number of units sold.
2. The cost of direct labour is $5 per hour.
3. Depreciation and rent are fixed costs within the relevant range of production. Additional costs would be incurred for
extra machinery and factory space if production is increased beyond current available capacity.
4. Rust allocates depreciation proportional to machinery use and rent proportional to factory space. Budgeted usage is as
follows:
Depreciation Item Ace Bell
Machinery 70% 30%
Factory Space 60% 40%

5. Other manufacturing support costs include variable costs equal to 10% of direct labour cost and also include various
fixed costs within the relevant range of production. None of the miscellaneous capacity-related fixed manufacturing
support costs depend on the level of activity, although support costs attributable to a specific product are avoidable if that
product’s production ceases. Other manufacturing support costs are allocated between Ace and Bell on the basis of a
percentage of budgeted direct labour cost.
6. Rust’s selling and general administrative costs are committed in the intermediate term.
7. Rust allocates selling costs on the basis of a number of units sold at Ace and Bell.
8. Rust allocates general and administrative costs on the basis of sales revenue.
 Budget Item Product Total Costs

Ace Bell

Budgeted sales in units 200,000 100,000

Selling price per unit $40 $20

Direct materials cost per unit $8 $3

Direct labour hours per unit 2 1

Depreciation $200,000

Rent $130,000

Other manufacturing support costs $500,000

Selling Costs $180,000

General and administrative costs $40,000

Required:
(a) Prepare a schedule, using separate columns for Ace and Bell, showing budgeted sales, variable costs, contribution margin,
fixed costs, and pretax operating profit for the year ending December 31, 2006.
 Budget Item Product Total Costs

Ace Bell
Budgeted sales in units 200,000 100,000

Selling price per unit $40 $20

Direct materials cost per unit $8 $3

Direct labour hours per unit 2 1

Depreciation $200,000

Rent $130,000
Other manufacturing support costs $500,000

Selling Costs $180,000

General and administrative costs $40,000

(b) Calculate the contribution margin per unit and the pretax operating profit per unit for Ace and for Bell.
(c) Calculate the effect on pretax operating profit resulting from a 10% decrease in sales and production of each product.
(d) What may be a problem with the above analysis?
 Rust Manufacturing Co.
BUDGET FOR ACE AND BELL
For the Year Ending December 31, 2006
Ace Bell
Sales (1) $8,000,000 $2,000,000
Variable costs:
Direct materials (2) $1,600,000 $300,000
Direct labor (3) 2,000,000 500,000
Variable mfg. support (4) 200,000 50,000
$3,800,000 $850,000

Contribution margin $4,200,000 $1,150,000

Fixed costs:
Depreciation (5) $140,000 $60,000
Rent (6) 78,000 52,000
Other mfg. support (7) 200,000 50,000
Selling costs (8) 120,000 60,000
Gen. & admin. costs (9) 32,000 8,000
$570,000 $230,000
Pretax operating profit $3,630,000 $920,000
Supporting calculations:
$2M
(1) Ace: 200,000 units $40/unit $8M (7) Ace: × ($500K – $250K) = $200K
$2.5M
Bell: 100,000 units $20/unit $2M
$500K
(2) Ace: 200,000 units $8/unit $1.6M Bell: × ($500K – $250K) = $50K
$2.5M
Bell: 100,000 units $3/unit $300K
(8) Ace: 200,000 units
(3) Ace: 200,000 units 2 hours $5/hour $2M Bell: 100,000 units
Bell: 100,000 1 hour $5/hour $500K 300,000 units

(4) Ace: $2M 10% $200K 200

Ace: × $180 K = $120K
Bell: $500K 10% $50K 300

100
(5) Ace: $200K 70% $140K Bell: × $180 K = $60K
300
Bell: $200K 30% $60K
$8M
(9) Ace: × $40K = $32K
(6) Ace: $130K 60% $78K $10M
Bell: $130K 40% $52K
$2M
Bell: × $40 K = $8K
$10M
(Note: M stands for millions and K stands for thousands.)
(b) Ace Bell
Contribution margin per unit $21.00 $11.50
Pretax operating profit per unit $18.15 $ 9.20

c) Decrease in contribution from 10% decrease in production and sales:

Ace: 200,000 × 10% × $21 = $420,000
Bell : 100,000 × 10% × $115 = $115,000

d) The above analysis relies on cost estimates based on allocation of other manufacturing support, selling support, and
general and administrative costs between Ace and Bell that ignores the activities that result in these support costs and
the relative demands placed by Ace and Bell for these manufacturing, selling, and administrative support activities. As
a result, it is possible that the above costs misrepresent the true cost of operations for Ace and Bell.