Exercise 14-25 Variance analysis, multiple products -- sales variances

Given:Soda-King manufactures and sells 3 soft drinks: Kola, Limor, and Orlem. Budgeted andactual results for 2011 are as follows:

Budget Information for 2011 Actual Information for 2011Selling Price Variable Cost Cartons Selling Price Variable Cost Cartons

Product per Carton per Carton Sold per Carton per Carton SoldKola $8.00 $5.00 480,000 $8.20 $5.50 467,500 Limor $6.00 $3.80 720,000 $5.75 $3.75 852,500 Orlem $7.50 $5.50 1,200,000 $7.80 $5.60 1,430,000

1. Use the post method to calculate the individual product and total product variances requested below. Calculate all variances in terms of contribution margin. a. Compute the sales-price variance for August 2011. b. Compute the sales-mix variance for August 2011. c. Compute the sales-quantity variance for August 2011. d. Compute the sales-volume variance for August 2011.

Budget for August 2011

Selling Price Variable Cost CM Sales Volume Budgeted Budgeted

Product per pound per pound per pound in pounds Sales Mix CM

Kola $8.00 $5.00 $3.00 480,000 0.20 $1,440,000

Limor $6.00 $3.80 $2.20 720,000 0.30 $1,584,000

Orlem $7.50 $5.50 $2.00 1,200,000 0.50 $2,400,000

2,400,000 1.00 $5,424,000

Budgeted W/A CM per unit $2.2600

Actual for August 2011

Selling Price Variable Cost CM Sales Volume Actual Actual

Product per pound per pound per pound in pounds Sales Mix CM

Kola $8.20 $5.50 $2.70 467,500 0.17 $1,262,250

Limor $5.75 $3.75 $2.00 852,500 0.31 $1,705,000

Orlem $7.80 $5.60 $2.20 1,430,000 0.52 $3,146,000

2,750,000 1.00 $6,113,250

Actual W/A CM per unit $2.2230

AQ Sales Price AQ Sales

Actual Actual Actual AM Variance Actual Actual Budgeted AM Mix

Product Quantity Sales Mix CM per Unit AP (Expressed in CM) Quantity Sales Mix CM per Unit BP Variance

Kola 2,750,000 0.17 $2.70 $1,262,250 ($140,250) 2,750,000 0.170 $3.00 $1,402,500 ($247,500)

Limor 2,750,000 0.31 $2.00 $1,705,000 ($170,500) 2,750,000 0.310 $2.20 $1,875,500 $60,500

Orlem 2,750,000 0.52 $2.20 $3,146,000 $286,000 2,750,000 0.520 $2.00 $2,860,000 $110,000

$6,113,250 ($24,750) $6,138,000 ($77,000)

Sales Price Sales

Variance Mix

(Expressed in CM) Variance

Unfavorable Unfavorable

($24,750) ($77,000)

2. What inferences can you draw from the variances computed in requirement #1?

The breakdown of the favorable sales-volume variance ($714,000 F) into a mix variance ($77,000 U)

and a quantity variance ($791,000 F) shows that the biggest contributor to the change in the income

of Soda-King is the 350,000 unit increase in sales. The sales price variance ($24,750 U) only partially

helps to explain this change in volume. For example, the selling price of Kola is raised and its volume

is reduced. However, the selling price of Orlem is raised, yet the volume of Orlem significantly increased.

Exercise 14-26 Market-share and market-size variances (continuation of 14-25).

Given: Soda-King prepared the budget for 2011 assuming a 12% market share based on total sales in the western region of the United States. The total soft drinks market was estimated to reach sales of 20 million cartons in the region. However, actual total sales volume in the western region was 27.5 million cartons. Calculate the market-share and market-size variances for Soda- King in 2011. Calculate all variances in terms of contribution margin. Use the post method.

Static Budget

Actual Market Size Market Actual Market Size Market Budgeted Market Size

Actual Market Share Share Budgeted Market Share Size Budgeted Market Share

Budgeted Average CM per Unit Variance Budgeted Average CM per Unit Variance Budgeted Average CM per Unit

27,500,000 X .10 X $2.260 27,500,000 X .12 X 2.260 20,000,000 X .12 X $2.260

$6,215,000 ($1,243,000) $7,458,000 $2,034,000 $5,424,000

Market-Share Market-Size

Variance Variance

Unfavorable Favorable

Actual Market Share

(2,750,000/27,500,000) = 0.10 Sales-Quantity Variance

Budgeted Market Share $791,000

(2,400,000/20,000,000) = 0.12 $791,000

Favorable

Sales-Volume Variance

$714,000

$714,000

Sales-Mix Variance Favorable Sales-Quantity Variance

($77,000) $791,000

Unfavorable $791,000

Favorable

Market-Share Variance Market-Size Variance

($1,243,000) $2,034,000

Unfavorable Favorable

AQ Sales BQ

Actual Budgeted Budgeted BM Quantity Budgeted Budgeted Budgeted BM

Quantity Sales Mix CM per Unit BP Variance Quantity Sales Mix CM per Unit BP

2,750,000 0.200 $3.00 $1,650,000 $210,000 2,400,000 0.20 $3.00 $1,440,000

2,750,000 0.300 $2.20 $1,815,000 $231,000 2,400,000 0.30 $2.20 $1,584,000

2,750,000 0.500 $2.00 $2,750,000 $350,000 2,400,000 0.50 $2.00 $2,400,000

$6,215,000 $791,000 $5,424,000

Sales

Quantity

Variance

Favorable

$791,000

Product

Kola ($37,500)

Limor $291,500

Orlem $460,000

Sales-Volume Variance

$714,000

$714,000

Favorable

Exercise 14-35 Direct materials efficiency, mix, and yield variances.

Given:Nature's Best Nuts produces specialty nut products for the gourmet and natural foods market.Its most popular product is Zesty Zingers, a mixture of roasted nuts that are seasoned with asecret spice mixture, and sold in one-pound tins. The direct materials used in Zesty Zingers arealmonds, cashews, pistachios, and seasoning. For each batch of 100 tins, the budgeted quantitiesand budgeted prices of direct materials are as follows:

Quantityper 100 Input in Input Price per

tin batch Cups Mix cupAlmonds 180 30% $1.00 Cashews 300 50% $2.00 Pistachios 90 15% $3.00 Seasoning 30 5% $6.00 Total 600 100%

Changing the standard mix of direct material quantities slightly does not significantly affect theoverall end product, particularly for the nuts. In addition, not all nuts added to production endup in the finished product, as some nuts are rejected during inspection.

following actual quantity, cost and mix of inputs:

Quantity

batches -- Actual Actual Total Price perCups Mix Price cup

Almonds 5,280 33% $5,280 $1.00 Cashews 7,520 47% $15,040 $2.00 Pistachios 2,720 17% $8,160 $3.00 Seasoning 480 3% $2,880 $6.00 Total 16,000 100% $31,360

Required:1. What is the budgeted cost of direct materials for the 2,500 tins? $30,750 2. Calculate the total direct materials efficiency variance. $610 3. Why is the total direct materials price variance zero? Actual prices per cup = Budgeted prices per cup4. Calculate the total direct materials mix and yield variances. ($1,440) F Mix Var.

Actual Quantity Actual Quantity Actual QuantityActual Mix Actual Mix Budgeted MixActual Price Budgeted Price Budgeted Price

Almonds $5,280 $0 F $5,280 $480 U $4,800 Cashews $15,040 $0 F $15,040 ($960) F $16,000 Pistachios $8,160 $0 F $8,160 $960 U $7,200 Seasoning $2,880 $0 F $2,880 ($1,920) F $4,800 Total $31,360 $0 F $31,360 ($1,440) F $32,800

Price Var. Mix Var.

Almonds $5,280 $780 Cashews $15,040 $40

In the current period, Nature's Best made 2,500 tins of Zesty Zingers in 25 batches with the

Used for 25

2,500 tins

Pistachios $8,160 $1,410 Seasoning $2,880 ($1,620) Total $31,360 $610

Efficiency Var.

What are the mix and yield variances telling you about the 2,500 tins produced this period?

relatively more of less expensive ingredients than planned. In this case, the actual mix contains slightly more almonds and pistachios, while using fewer cashews and substantially less seasoning.

input to produce 2,500 tins of output when the budgeted amount of input was only 15,000 cups (600 X 25 = 15,000).

Are the variances large enough to investigate?

The direct materials yield variance is probably significant enough to be investigated. Inputs were up (16,000 - 15,000)/15,000 = 6.7% in total.

The mix variance, although smaller, should be monitored since it is favorable largely due to the use of less seasoning, which is probably considered an important element of the product's appeal to customers. Note the cost savings by replacing relatively expensive seasoning with almonds and pistachios.

Mix % of Actual Budgeted Price PerVariance Budget Mix Mix Cup

Almonds U $480 10.00% 33% 30% $1.00 Cashews F ($960) -6.00% 47% 50% $2.00 Pistachios U $960 13.33% 17% 15% $3.00 Seasoning F ($1,920) -40.00% 3% 5% $6.00 Total ($1,440) -4.39% 100% 100%

The direct materials mix variances totaling $1,440 F indicates that the actual product mix uses

The direct materials yield variances totaling $2,050 U is the result of needing 16,000 cups of

almonds, cashews, pistachios, and seasoning. For each batch of 100 tins, the budgeted quantities

UActual prices per cup = Budgeted prices per cup

$2,050 U Yield Var.

Actual Quantity Budgeted QuantityBudgeted Mix Budgeted MixBudgeted Price Budgeted Price

$300 U $4,500 0.066667$1,000 U $15,000 0.066667

$450 U $6,750 0.066667$300 U $4,500 0.066667

$2,050 U $30,750 0.066667Yield Var.

U $4,500 U $15,000

U $6,750 F $4,500 U $30,750

Efficiency Var.

contains slightly more almonds and pistachios, while using fewer cashews and substantially

input to produce 2,500 tins of output when the budgeted amount of input was only 15,000 cups

The direct materials yield variance is probably significant enough to be investigated. Inputs

The mix variance, although smaller, should be monitored since it is favorable largely due

totaling $1,440 F indicates that the actual product mix uses

totaling $2,050 U is the result of needing 16,000 cups of

Exercise 14-36 Direct labor variances: price, efficiency, mix, and yield variances.

Given:Trevor Joseph employs two workers in his guitar-making business. The first worker, George, has

budgeted direct labor quantities and prices for one guitar are as follows:

Input Hourly Cost PerWorker Hours Mix Pay Guitar

George 6 60% $30 $180 Earl 4 40% $20 $80 Total 10 100% $260

less, or vice versa, with no obvious change in the quality or function of the guitar.

follows:Actual hrs. Total

Actual Labor Price perWorker guitars Mix Cost Hour

George 145 57.31% $4,350 $30.00 Earl 108 42.69% $2,160 $20.00 Total 253 100.00% $6,510

Required:1. $6,500 2. Calculate the total direct labor price and efficiency variance. $0 F Price Var.

Why is the total direct labor price variance zero? Actual hourly rates = Budgeted hourly rates3.

direct labor used? 253 hoursWhat is the actual direct labor input mix percentage? See table above.What is the budgeted amount of George's and Earl's labor that

250 hours4. Calculate the total direct labor mix and yield variances. ($68) F Mix Var.

How do these numbers relate to the total direct labor efficiencyvariance? $10 U Efficiency is the sum of the mix and yield variances.

Actual Quantity (Hrs.) Actual Quantity (Hrs.) Actual Quantity (Hrs.)Actual Mix Actual Mix Budgeted MixActual Price Budgeted Price Budgeted Price

George $4,350 $0 F $4,350 ($204) F $4,554 Earl $2,160 $0 F $2,160 $136 U $2,024 Total $6,510 $0 F $6,510 ($68) F $6,578

Price Var. Mix Var.

George $4,350 ($150)Earl $2,160 $160 Total $6,510 $10

been making guitars for 20 years and is paid $30 per hour. The second worker, Earl, is not as experienced, and is paid $20 per hour. One guitar requires, on average, 10 hours of labor. The

That is, each guitar is budgeted to require 10 hours of direct labor, comprised of 60% of George'slabor and 40% of Earl's labor. Sometimes Earl works more hours on a particular guitar and George

During the month of August, Joseph manufactures 25 guitars. Actual direct labor costs are as

for 25

What is the budgeted cost of direct labor for the 25 guitars?

For the 25 guitars produced, what is the total actual amount of

should have been used for the 25 guitars?

Efficiency Var.

What are the mix and yield variances telling you about the 25 guitars produced this period?

the more expensive laborer (George) than the budgeted mix.

The yield variance indicates that the guitars required 1.2% more total inputs (253 hours)than expected (250 hours) for the production of 25 guitars. It is likely that Earl, who is lessexperienced, worked more slowly than George, which caused the unfavorable yieldvariance.

Both variances are relatively small and probably within acceptable limits. However, theowner of the company, Trevor Joseph should be careful that using more of the cheaperlabor does not reduce the quality of the guitar or the perceived quality of the guitar bycustomers or potential customers.

The favorable mix variance arises from using more of the cheaper laborer (Earl) and less of

Trevor Joseph employs two workers in his guitar-making business. The first worker, George, has

$10 U Efficiency Var.Actual hourly rates = Budgeted hourly rates

$78 U Yield Var.

U Efficiency is the sum of the mix and yield variances.

Actual Quantity (Hrs.) Budgeted Quantity (Hrs.)Budgeted Mix Budgeted MixBudgeted Price Budgeted Price

$54 U $4,500 0.012$24 U $2,000 0.012 1.012$78 U $6,500 0.012

Yield Var.

F $4,500 U $2,000 U $6,500

of Earl's labor. Sometimes Earl works more hours on a particular guitar and George

Efficiency Var.

1.20%

Exercise 14-19 Cost allocation to divisionsGiven:Lenzig Corporation has three divisions: Fibers, Paper, and Pulp. Lenzig's new controller, AriBardem, is reviewing the allocation of fixed corporate-overhead costs to the three divisions.He is presented with the following information for each division for 2012:

Pulp Paper Fibers TotalRevenue $8,500,000 $17,500,000 $24,000,000 $50,000,000 Direct manufacturing costs 4,100,000 8,600,000 11,300,000 24,000,000 Divisional administrative costs 2,000,000 1,800,000 3,200,000 7,000,000 Division margin $2,400,000 $7,100,000 $9,500,000 $19,000,000

Number of employees 350 250 400 1,000 Floor space (square feet) 35,000 24,000 66,000 125,000

Until now, Lenzig Corporation has allocated fixed corporate-overhead costs to the divisionsbased on of division margins. Bardem asks for a list of costs that comprise fixed corporateoverhead and suggests the following new allocation bases:

Fixed Corporate Overhead Cost Category Costs Suggested Allocation Bases

Human resource management costs $1,800,000 Number of employees

Facility costs 2,700,000 Floor space (square feet)

Corporate administrative costs 4,500,000 Divisional administrative costs

Total Fixed Corporate Overhead Costs $9,000,000

Required:1. Allocate 2012 fixed corporate-overhead costs to the 3 divisions using division margin as

the allocation base. What is each division's operating margin % (division margin minusallocated fixed corporate-overhead costs as a percentage of revenue)?

Pulp Paper Fibers TotalAllocated corporate-overhead costs $1,136,842 $3,363,158 $4,500,000 $9,000,000

Pulp Paper Fibers TotalDivision margin $2,400,000 $7,100,000 $9,500,000 $19,000,000 Allocated corporate-overhead costs 1,136,842 3,363,158 4,500,000 9,000,000 Division operating margin $1,263,158 $3,736,842 $5,000,000 $10,000,000

Division operating margin percentage 14.86% 21.35% 20.83% 20.00%

2. Allocate 2012 fixed costs using the allocation bases suggested by Bardem. What is eachdivision's operating margin percentage under the new allocation scheme?

Pulp Paper Fibers TotalHuman resource mgmt. costs $630,000 $450,000 $720,000 $1,800,000 Facility costs 756,000 518,400 1,425,600 2,700,000 Corporate administrative costs 1,285,714 1,157,143 2,057,143 4,500,000

Total Indirect FOH Costs $2,671,714 $2,125,543 $4,202,743 $9,000,000

Pulp Paper Fibers Total

Division margin $2,400,000 $7,100,000 $9,500,000 $19,000,000 Allocated corporate-overhead costs 2,671,714 2,125,543 4,202,743 9,000,000 Division operating margin ($271,714) $4,974,457 $5,297,257 $10,000,000

Division operating margin percentage -3.20% 28.43% 22.07% 20.00%

3. Compare and discuss the results of requirements 1 and 2. If division performance islinked to operating margin %, which division would be most receptive to the newallocation scheme? Which division would be the least receptive? Why?

When corporate overhead is allocated to the divisions on the basis of division margins(requirement 1), each division appears profitable each having positive operating margin. The Paper division appears the most profitable having the highest operating margin % while the Pulp division appears least profitable.

When Bardem's suggested bases are used to allocate fixed corporate-overhead costs(requirement 2), the Pulp division appears unprofitable having a negative operating %. Paper appears to be the most profitable -- significantly more profitable than the Fibersdivision.

4. Which allocation scheme should Lenzig Corporation use? Why? How might Bardemovercome any objections that may arise from the divisions?

The new approach is preferable because the indirect FOH costs are divided into threehomogeneous cost pools with distinctive cost drivers. These drivers are used to allocatethe cost pool costs based on cause-and-effect relationships. The old method used division

a. HR costs are allocated using the number of employees in each division because thecosts for recruitment, training, etc., are mostly related to the number of employeesin each division.

b. Facility costs are mostly incurred on the basis of space occupied by each division.

c. Corporate administrative costs are allocated on the basis of divisional administrativecosts because these costs are incurred to provide support to divisional administrations.

corporate overhead to divisions when evaluating performance. He could start by sharingthe results with the divisions, and giving them—particularly the Pulp division—adequatetime to figure out how to reduce their share of cost drivers. He should also develop benchmarks by comparing the consumption of corporate resources to competitors andother industry standards.

margins which are the result of cost relationships not the cause of them.

The cost drivers used are based on logical cause and effect relationships. For example:

To overcome objections from the divisions, Bardem may initially choose not to allocate

Exercise 14-22Given:Figure Four is a distributor of pharmaceutical products. Its ABC system has 5 activities.

Activity Area: Cost Driver Rate in 2012Order processing $40 per orderLine-item ordering $3 per line itemStore deliveries $50 per store deliveryCarton deliveries $1 per cartonShelf-stocking $16 per stocking-hour

Rick Flair, the controller of Figure Four, wants to use this ABC system to examine individualcustomer profitability within each distribution market. He focuses first on the Ma and Pa single-store distribution market. Two customers are used to exemplify the insights availablewith the ABC approach. Data pertaining to these two customers in August 2012 are as follows:

Charleston Chapel HillPharmacy Pharmacy

Total orders 13 10Average line items per order 9 18Total store deliveries 7 10Average cartons shipped per store delivery 22 20Average hours of shelf stocking/store delivery 0 0.5Average revenue per delivery $2,400 $1,800Average cost of goods sold per delivery $2,100 $1,650

Required:1. Use the ABC information to compute the operating income of each customer in August

2012. Comment on the results and what, if anything, Flair should do.

Charleston Chapel HillPharmacy Pharmacy

Revenue $16,800 $18,000Less Cost of Goods Sold 14,700 16,500Gross Profit $2,100 $1,500 Less Operating Costs Driver Rate

Order processing $40 per order $520 $400 Line-item ordering $3 per line item 351 540 Store deliveries $50 per store delivery 350 500 Carton deliveries $1 per carton 154 200 Shelf-stocking $16 per stocking-hour 0 80

Total Operating Costs $1,375 $1,720 Operating Income $725 ($220)

Chapel Hill Pharmacy has a lower gross margin % than Charleston and it consumes more resources to obtain this lower margin.

Gross Margin Revenue GM%Charleston Gross Margin % $2,100 $16,800 12.500%Chapel Hill Gross Margin % $1,500 $18,000 8.333%

2. Flair ranks the individual customers in the Ma and Pa single-store distribution market onthe basis of monthly operating income. The cumulative operating income of the top 20%of customers is $55,680. Figure Four reports negative operating income of $21,247 for the

bottom 40% of its customers.

Make four recommendations that you think Figure Four should considerin light of this new customer-profitability information.

1. Pay increased attention to profitable customers -- don’t want to loose them2. Reduce the activity cost driver rates -- make value-added activities more efficient3. Reduce or eliminate non-value added activities4. Eliminate unprofitable customers who cannot be made profitable5. Pay bonuses based on customer operating income.

Exercise 14-34Given:Debbie's Delight, Inc., operates a chain of cookie stores. Budgeted and actual operating data of its three Chicago stores for August 2009 are asfollows:

Budget for August 2009

Selling Price Variable Cost CM Sales Volume Budgeted Budgeted

per pound per pound per pound in pounds Sales Mix TCM

Chocolate chip 4.50 2.50 2.00 45,000 0.45 90,000

Oatmeal raisin 5.00 2.70 2.30 25,000 0.25 57,500

Coconut 5.50 2.90 2.60 10,000 0.10 26,000

White chocolate 6.00 3.00 3.00 5,000 0.05 15,000

Macadamia nut 6.50 3.40 3.10 15,000 0.15 46,500

Total 100,000 1.00 235,000

Budgeted W/A CM per unit $2.35

Actual for August 2009

Selling Price Variable Cost CM Sales Volume Actual Actual

per pound per pound per pound in pounds Sales Mix TCM

Chocolate chip 4.50 2.60 1.90 57,600 0.48 109,440

Oatmeal raisin 5.20 2.90 2.30 18,000 0.15 41,400

Coconut 5.50 2.80 2.70 9,600 0.08 25,920

White chocolate 6.00 3.40 2.60 13,200 0.11 34,320

Macadamia nut 7.00 4.00 3.00 21,600 0.18 64,800

120,000 1.00 275,880

Debbie's Delight focuses on CM in its variance analysis. Actual W/A CM per unit $2.30

Required:1. Compute the total sales-volume variance for August 2009.2. Compute the total sales-mix variance for August 2009.3. Compute the total sales-quantity variance for August 2009.

Actual Quantity Sold Sales Price Actual Quantity Sold

Actual Sales Mix (in CM) Actual Sales Mix

Actual CM per Unit Variance Budgeted CM per Unit

Chocolate chip $109,440 ($5,760)

Oatmeal raisin $41,400 $0

Coconut $25,920 $960

White chocolate $34,320 ($5,280)

Macadamia nut $64,800 ($2,160)

$275,880 ($12,240)

$2.30 Sales Price

(in CM) (SP - VC)

Variance

Unfavorable

4. Comment on your results in requirements 1, 2, 3.

120,000 X .48 X $1.90 = 120,000 X .48 X $2.00 =

120,000 X .15 X $2.30 = 120,000 X .15 X $2.30 =

120,000 X .08 X $2.70 = 120,000 X .08 X $2.60 =

120,000 X .11 X $2.60 = 120,000 X .11 X $3.00 =

120,000 X .18 X $3.00 = 120,000 X .18 X $3.10 =

Debbie's Delight shows a favorable sales-quantity variance because it sold more cookies in total (120,000#'s)than was budgeted (100,000#'s).

Together with the higher quantities, Debbie's also sold more of the high-contribution margin white chocolate and macadamia nut cookies relative to the budgeted mix -- hence, Debbie's also showed a favorable totalsales-mix variances. ($2.40 - $2.35)

The Sales Price (Expressed in CM) Variance which is unfavorable reflects the fact that differences in sales priceand variable cost from budgeted values decreased income by $12,240.

Exercise 14-35Given:

Required:Compute the market-share and market-size variances for Debbie's Delight in August 2009. Report allvariances in CM terms. Comment on the results.

Actual Market Size Market Actual Market Size

Actual Market Share Share Budgeted Market Share

Budgeted Average CM per Unit Variance Budgeted Average CM per Unit

$282,000 $56,400 $225,600 Market-Share

Actual Market Share VarianceFavorable

0.125Sales-Quantity Variance

$47,000 $47,000

FavorableBy increasing its actual market share from the 10% budgeted to the actual12.5%, Debbie's Delight has a favorable market-share variance of $56,400.

There is a smaller offsetting unfavorable market-size variance of $9,400 dueto the 40,000 unit decline in the Chicago market (from 1,000,000 budgeted to an actual of 960,000).

Overview of 14-34 and 14-35: $53,120 Sales-Volume Variance

$53,120 F

Sales-Mix Variance Sales-Quantity Variance$6,120 F $47,000 F

Debbie's Delight expects to attains a 10% market share based on total sales of the Chicago market. The total Chicagomarket is expected to be 1,000,000 pounds in sales volume for August 2009. The actual total Chicago market for August 2009 was 960,000 pounds in sales volume.

960,000 X .125 X $2.35 960,000 X .10 X 2.35

(120,000/960,000) = .125

Market-Share Variance Market-Size Variance$56,400 F

Static Budget

Actual Quantity Sold Sales Actual Quantity Sold Sales Budget Quantity Sold

Actual Sales Mix Mix Budgeted Sales Mix Quantity Budgeted Sales Mix

Budgeted CM per Unit Variance Budgeted CM per Unit Variance Budgeted CM per Unit

$115,200 $7,200 $108,000 $18,000

$41,400 ($27,600) $69,000 $11,500

$24,960 ($6,240) $31,200 $5,200

$39,600 $21,600 $18,000 $3,000

$66,960 $11,160 $55,800 $9,300

$288,120 $6,120 $282,000 $47,000

$2.40 Sales $2.35 Sales

Mix Quantity

Variance Variance

Favorable Favorable

Sales-Volume Variance

$53,120

$53,120

Favorable

120,000 X .45 X $2.00 = 100,000 X .45 X $2.00 =

120,000 X .25 X $2.30 = 100,000 X .25 X $2.30 =

120,000 X .10 X $2.60 = 100,000 X .10 X $2.60 =

120,000 X .05 X $3.00 = 100,000 X .05 X $3.00 =

120,000 X .15 X $3.10 = 100,000 X .15 X $3.10 =

Debbie's Delight shows a favorable sales-quantity variance because it sold more cookies in total (120,000#'s)

Together with the higher quantities, Debbie's also sold more of the high-contribution margin white chocolate and macadamia nut cookies relative to the budgeted mix -- hence, Debbie's also showed a favorable total

The Sales Price (Expressed in CM) Variance which is unfavorable reflects the fact that differences in sales price

Static Budget

Actual Market Size Market Budgeted Market Size

Budgeted Market Share Size Budgeted Market Share

Budgeted Average CM per Unit Variance Budgeted Average CM per Unit

($9,400) $235,000 Market-Size

Variance Budgeted Market ShareUnfavorable

0.10Sales-Quantity Variance

market share based on total sales of the Chicago market. The total Chicago pounds in sales volume for August 2009. The actual total Chicago market for

960,000 X .10 X 2.35 1,000,000 X .10 X $2.35

(100,000/1,000,000) = .10

Market-Size Variance$9,400 U

Budget Quantity Sold

Budgeted Sales Mix

Budgeted CM per Unit

$90,000

$57,500

$26,000

$15,000

$46,500

$235,000

$2.35

Exercise 14-37Given:PDS Manufacturing makes wooden furniture. One of their products is a wooden dresser. The exterior and some of theshelves are made of oak, a high quality wood, but the interior drawers are made of pine, a less expensive wood. The budgeted direct materials quantities and prices for one dresser are:

Price Per Cost ForQuantity Budgeted Unit of One

Type of Wood Board Feet Mix Input DresserOak 8 0.40 $6.00 $48 Pine 12 0.60 2.00 24 Total 20 $72 $3.60

That is, each dresser is budgeted to use 20 board feet of wood, comprised of 40% oak and 60% pine, although sometimes more pine is used in place of oak with no obvious change in the quality or function of the dresser.

During the month of May, PDS manufactures 3,000 dressers. Actual direct materials costs are:

Board Feet Actual Mix Actual Cost Per Unit Cost

Oak 23,180 0.38 $141,398 $6.10 Pine 37,820 0.62 $68,076 $1.80

61,000 $209,474 $3.43 Required:1. What is the budgeted cost of direct materials for 3,000 dressers?

3,000 X 20 X $3.60 = $216,000 60,000

2. Calculate the total direct materials price and efficiency variances.

See below. DM Price Variance ($5,246) FavorableDM Efficiency Variance ($1,280) Favorable

3. For the 3,000 dressers, what is the total actual amount of oak and pine used?

See below. 61,000

What is the actual DM input mix percentage?

Board Feet Actual Mix Actual CostOak 23,180 0.38 $141,398 Pine 37,820 0.62 $68,076

61,000 $209,474

What is the budgeted amount of oak and pine that should have been used for the 3,000 dressers?

Oak 3,000 X 20 X .40 = 24,000 Pine 3,000 X 20 X .60 = 36,000

60,000

4. Calculate the total direct materials mix and yield variances. How do these numbers relate to the

total direct materials eficiency variance? What do these variances tell you?

Actual Quantity Actual Quantity

Actual Mix Price Actual Mix

Actual Price Variance Budgeted Price

Oak $141,398 $2,318

Pine $68,076 (7,564)

$209,474 ($5,246)

Price

Favorable

Price Variance: The net $5,246 favorable price variance results from a decrease in the price per boardfoot of pine of sufficient magnitude to offset and unfavorable price increase per boardfoot of oak.

Mix Variance: The favorable mix variance arises from using more of the cheaper pine (and less oak)than the budgeted mix.

Yield Variance: The yield variance indicates that the dressers required more total inputs (61,000 b.f.)than expected (60,000 b.f.) for the production of 3,000 dressers.

Both variances are relatively small and probably within tolerable limits.

PDS should investigate whether substituting the cheaper pine for the more expensive oak caused theunfavorable yield variance.

PDS should also be careful that using more of the cheaper pine does not reduce the quality of the dresseror how the customers perceive it.

61,000 X .38 X $6.10 = 61,000 X .38 X $6 =

61,000 X .62 X $1.80 = 61,000 X .62 X $2 =

PDS Manufacturing makes wooden furniture. One of their products is a wooden dresser. The exterior and some of theshelves are made of oak, a high quality wood, but the interior drawers are made of pine, a less expensive wood. The

That is, each dresser is budgeted to use 20 board feet of wood, comprised of 40% oak and 60% pine, although sometimes more pine is used in place of oak with no obvious change in the quality or function of the dresser.

What is the budgeted amount of oak and pine that should have been used for the 3,000 dressers?

4. Calculate the total direct materials mix and yield variances. How do these numbers relate to the

Actual Quantity Actual Quantity Budgeted Quantity

Actual Mix Mix Budgeted Mix Yield Budgeted Mix

Budgeted Price Variance Budgeted Price Variance Budgeted Price

$139,080 ($7,320) $146,400 $2,400

$75,640 2,440 $73,200 1,200

$214,720 ($4,880) $219,600 $3,600

Mix Yield

Variance ($1,280) Unfavorable

($4,880) Efficiency $3,600

Favorable Favorable

($1,280)

The net $5,246 favorable price variance results from a decrease in the price per boardfoot of pine of sufficient magnitude to offset and unfavorable price increase per board Alternative Calculation of Yield Variance

20.3333333 Actual BF of input per dresser produced

20.0000000 Budgeted BF of input per dresser produced

The favorable mix variance arises from using more of the cheaper pine (and less oak) 0.3333333 Extra BF of input per dresser produced

$3.60 W/A budgeted cost per BF of input

$1.2000000 Extra cost per dresser produced

The yield variance indicates that the dressers required more total inputs (61,000 b.f.) 3,000 Dressers produced

$3,600 Unfavorable Yield Variance

Alternative Calculation of Yield Variance0.0500000 Budgeted: Dressers per BF of input

PDS should investigate whether substituting the cheaper pine for the more expensive oak caused the 0.0491803 Actual: Dressers per BF of input

0.0008197 Decreased dressers per BF of input

$72 W/A budgeted cost per dresser

PDS should also be careful that using more of the cheaper pine does not reduce the quality of the dresser $0.0590164 Extra cost per BF of input

61,000 BF of input

$3,600 Unfavorable Yield Variance

61,000 X .40 X $6 = 60,000 X .40 X $6 =

61,000 X .60 X $2 = 60,000 X .60 X $2 =

Budgeted Quantity

Budgeted Mix

Budgeted Price

$144,000

72,000

$216,000

Exercise 14-31Given:Sherriton's loyalty program consists of three different customer loyalty levels.

Bronze CardAvailable to all new customers.Complimentary bottle of wine/night $5 cost to company$20 Restaurant coupons/night $10 cost to company10% discount off the nightly rate 10% nightly discount

Silver upgradeAfter 20 night's "stay and pay"Complimentary bottle of wine/night $5 cost to company$30 Restaurant coupons/night $15 cost to company20% discount off the nightly rate 20% nightly discount

Gold upgradeAfter 50 night's "stay and pay"Complimentary bottle of champagne/night $20 cost to company$40 Restaurant coupons/night $20 cost to company30% discount off the nightly rate 30% nightly discount

The average full price for one night's stay $200 Other variable cost per night stayed $65 Total fixed costs for the chain are $140,580,000 Sherriton operates: 10 hotels

500 rooms per hotel365 days per year

80% average occupancy rateLoyalty program characteristics:

Customer Type # of Customers Average # of Nights

Gold 2,430 60

Silver 8,340 35

Bronze 80,300 10

No Program 219,000 1

Required:1. Calculate the program CM for each of the customer types. Which is most

profitable? Which is the least profitable? Do not allocate fixed costs toindividual rooms or specific loyalty programs.

2. Prepare an income statement for Sherriton for the year ended 12/31/2006?

GoldRevenues

1st 20 nights $8,748,000 21st to 50th night 11,664,000 51st to 60th night 3,402,000 $23,814,000

Variable CostsVC of hotel room $9,477,000 Wine 607,500 Champagne 486,000 Restaurant costs

1st 20 nights 486,000 21st to 50th night 1,093,500 51st to 60th night 486,000 12,636,000

Contribution margin $11,178,000

SilverRevenues

1st 20 nights $30,024,000 21st to 35th night 20,016,000 $50,040,000

Variable CostsVC of hotel room $18,973,500 Wine 1,459,500 Restaurant costs

1st 20 nights 1,668,000 21st to 35th night 1,876,500 23,977,500

Contribution margin $26,062,500

BronzeRevenues

1st 10 nights $144,540,000 Variable Costs

VC of hotel room $52,195,000 Wine 4,015,000 Restaurant costs 8,030,000 64,240,000

Contribution margin $80,300,000

No ProgramRevenues $43,800,000 VC of Hotel room 14,235,000 Contribution margin $29,565,000

Summary Gold Silver Bronze No ProgramRevenue $23,814,000 $50,040,000 $144,540,000 $43,800,000 Variable Costs 12,636,000 23,977,500 64,240,000 14,235,000 Contribution margin $11,178,000 $26,062,500 $80,300,000 $29,565,000

Fixed CostsOperating Income

Contribution margin % 46.939% 52.083% 55.556% 67.500%Lowest Highest

3. What is the average room rate per night? What are the average VC per nightinclusive of the loyalty program?Total nights

Gold 145,800 Silver 291,900 Bronze 803,000 No program 219,000

Total 1,459,700

Total revenues $262,194,000

Average room rate per night $179.62

Total variable costs $115,088,500

Average VC per night $78.84

4. Explain what drives the profitability (or lack thereof) of Sherriton's loyaltyprogram.

Loyalty programs aim to generate profitable repeat business.Given the low level of variable costs to room rates, there is considerablecushion available for Sherriton to offer high inducements for frequent stayers.

Added questions:5. Does it appear that Sherriton's loyalty program is working?

Sherriton operates: 10 hotels500 rooms per hotel365 days per year

80% average occupancy rateLoyalty program characteristics:

Customer Type # of Customers Average # of Nights Total Rentals

Gold 2,430 60 145,800 Silver 8,340 35 291,900 Bronze 80,300 10 803,000 No Program 219,000 1 219,000

1,459,700

Pre-Plan Post-PlanTotal rooms available for rent 1,825,000 1,825,000 Rooms rented 1,460,000 1,459,700 Average occupancy rate 0.80000 0.79984 Average CM per rental $135 $100.78 Total CM $197,100,000 $147,105,500 Decrease in TCM post-plan $49,994,500

No!

6. How might your answer to question 5 be improved with some additional data?

1. Was there a change in the industry market size? More travel? Fewer/More available rooms?2. What extra revenue was generated because of the restaurant coupons.3. A loyalty plan might work well for some hotels or geographical areas but not in others.

Total$262,194,000

115,088,500 $147,105,500

140,580,000 $6,525,500

2

Exercise 14-37Given:Greenwood, Inc., processes apples into applesauce and apple butter. Greenwood's applesauce is made with a blend

in November 2006 are as follows:

Actual FlexibleQuantity Actual Actual Actual Budgeted Budgeted

Applesauce (Pounds) Mix Price Cost Quantity MixTohlman 72,000 0.20 $0.35 $25,200 52,500 0.15 Golden Delicious 180,000 0.50 $0.29 52,200 210,000 0.60 Ribston 108,000 0.30 $0.22 23,760 87,500 0.25 Total 360,000 1.00 $101,160 350,000 1.00

Required:1. Calculate the total DM price and efficiency variance for November 2006.2. Calculate the total direct materials mix and yield variances for November 2006.3. Comment on your results in requirement 1 and 2.

Actual Quantity Actual Quantity

Actual Mix Price Actual Mix

Actual Price Variance Budgeted Price

Tohlman $25,200 ($3,600)

Golden Delicious $52,200 (1,800)

Ribston $23,760 2,160

$101,160 ($3,240)

Price

Favorable

Greenwood paid less per pound for Tolman and Golden Delicious apples than budgeted and, so it had a favorable directmaterials price variance of $3,240 (F).

It also had an unfavorable efficiency variance of $2,900. Greenwood would need to evaluate if these were unrelatedevents or if the lower price resulted from the purchase of apples of poorer quality that affected efficiency. The net effectin this case from a cost standpoint was favorable -- the savings in price being greater than the loss in efficiency.

Of course, if the applesauce is of poorer quality, Greenwood must also evaluate the potential effects on current and future revenues that have not been considered in the variances above.

The unfavorable efficiency is entirely attributable to an unfavorable yield ( the mix variance nets to zero). Managementshould evaluate the reasons for the unfavorable yield variance. Is it due to poor quality Tolman and Ribston apples whichwere acquired at a price lower than budgeted.

of Tolman, Golden Delicious, and Ribston apples. Budgeted and actual costs to produce 150,000 pounds of applesauce

360,000 X .20 X $.35 = 360,000 X .20 X $.40 =

360,000 X .50 X $.29 = 360,000 X .50 X $.30 =

360,000 X .30 X $.22 = 360,000 X .30 X $.20 =

Greenwood, Inc., processes apples into applesauce and apple butter. Greenwood's applesauce is made with a blend

Budgeted BudgetedPrice Cost

$0.40 $21,000 $0.30 63,000 $0.20 17,500

$101,500

Actual Quantity Actual Quantity Budgeted Quantity

Actual Mix Mix Budgeted Mix Yield Budgeted Mix

Budgeted Price Variance Budgeted Price Variance Budgeted Price

$28,800 $7,200 $21,600 $600 $21,000

$54,000 (10,800) $64,800 1,800 63,000

$21,600 3,600 $18,000 500 17,500

$104,400 $0 $104,400 $2,900 $101,500

Mix Yield

Variance $2,900 Unfavorable

$0 Efficiency $2,900

Unfavorable

$2,900 Alternative Calculation of Yield Variance

Greenwood paid less per pound for Tolman and Golden Delicious apples than budgeted and, so it had a favorable direct 2.33333333 Budgeted #'s of input per # of output

2.4000000 Actual #'s of input per # of output

-0.0666667 Extra #'s of input per # of output

It also had an unfavorable efficiency variance of $2,900. Greenwood would need to evaluate if these were unrelated $0.290000 W/A budgeted cost per # of input

events or if the lower price resulted from the purchase of apples of poorer quality that affected efficiency. The net effect ($0.01933) Extra cost per # of output

in this case from a cost standpoint was favorable -- the savings in price being greater than the loss in efficiency. 150,000 Pounds of output

($2,900.00) Unfavorable Yield Variance

Of course, if the applesauce is of poorer quality, Greenwood must also evaluate the potential effects on current and Alternative Calculation of Yield Variance0.42857143 Budgeted: #'s of output per # of input

The unfavorable efficiency is entirely attributable to an unfavorable yield ( the mix variance nets to zero). Management 0.4166667 Actual: #'s of output per # of input

should evaluate the reasons for the unfavorable yield variance. Is it due to poor quality Tolman and Ribston apples which 0.01190476 Decreased #'s of output per # of input

$0.676667 W/A budgeted cost per # of output

$0.008056 Extra cost per # of input

360,000 Pounds of input

$2,900.00 Unfavorable Yield Variance

150,000 pounds of applesauce

360,000 X .15 X $.40 = 350,000 X .15 X $.40 =

360,000 X .60 X $.30 = 350,000 X .60 X $.30 =

360,000 X .25 X $.20 = 350,000 X .25 X $.20 =

Exercise 14-36Given:The Energy Products Company produces a gasoline additive, Gas Gain, thatincreases engine efficiency and improves gasoline mileage. The actual and budgeted quantities (in gallons) of materials required to produce Gas Gain andthe budgeted prices of materials in August 2003 are as follows:

FlexibleActual Actual Budgeted Budgeted Actual Budgeted

Chemical Quantity Mix Quantity Mix Price PriceEchol 24,080 0.28 25,200 0.30 $0.22 $0.20 Protex 15,480 0.18 16,800 0.20 $0.46 $0.45 Benz 36,120 0.42 33,600 0.40 $0.12 $0.15 CT-40 10,320 0.12 8,400 0.10 $0.27 $0.30 Total 86,000 1.00 84,000 1.00

Required:1. Calculate the total DM efficiency variance for August 2003.2. Calculate the total direct materials mix and yield variances for August 2003.3. What conclusions would you draw from the variance analysis?

Actual Quantity Actual Quantity

Actual Mix Price Actual Mix Mix

Actual Price Variance Standard Price Variance

Echol 86,000 X .28 X $.22 = $5,297.60 $481.60 86,000 X .28 X $.20 = $4,816.00 ($344.00)

Protex 86,000 X .18 X $.46 = $7,120.80 $154.80 86,000 X .18 X $.45 = $6,966.00 ($774.00)

Benz 86,000 X .42 X $.12 = $4,334.40 ($1,083.60) 86,000 X .42 X $.15 = $5,418.00 $258.00

CT-40 86,000 X .12 X $.27 = $2,786.40 ($309.60) 86,000 X .12 X $.30 = $3,096.00 $516.00

$19,539.20 ($756.80) $20,296.00 ($344.00)

Price Mix

Favorable

Energy products used a larger total quantity of direct-material inputs than budgeted,and so showed an unfavorable yield variance.

The mix variance was favorable because the actual mix contained more of the budgetedcheapest input, Benz, and less of the most costly input, Protex, than the budgeted mix.

The favorable mix variance offset some, but not all, of the unfavorable yield variance --the overall efficiency variance was unfavorable.

Energy Products will find it profitable to shift to the cheaper mix only if the yield from thischeaper mix can be improved. Energy products must also consider the effect on output quality of using the cheaper mix, and the potential consequences for future revenues.

Actual Quantity Standard Quantity

Standard Mix Yield Standard Mix

Standard Price Variance Standard Price

86,000 X .30 X $.20 = $5,160.00 $120.00 84,000 X .30 X $.20 = $5,040.00

86,000 X .20 X $.45 = $7,740.00 $180.00 84,000 X .20 X $.45 = $7,560.00

86,000 X .40 X $.15 = $5,160.00 $120.00 84,000 X .40 X $.15 = $5,040.00

86,000 X .10 X $.30 = $2,580.00 $60.00 84,000 X .10 X $.30 = $2,520.00

$20,640.00 $480.00 $20,160.00

Yield

$136.00 Unfavorable

Efficiency

Unfavorable