Character of Variances, accounting homework help

15-1Character of Variances

Required

Compute variances for the items shown in the following list and indicate whether each variance is favorable (F) or unfavorable (UF).

Item

Budget

Actual

Variance

F or UF

Selling and Administrative Expenses

$29,000

$27,000

Sales Revenue

$310,000

$325,000

Materials Price

$2.00 per lb.

$2.10 per lb.

Cost of Goods Sold

$125,000

$100,000

Materials Purchases

$250,000

$265,000

Materials Usage

6,000 lbs.

5,800 lbs.

Sales Price

$550 each

$500 each

Labor Rate

$8.10 per hour

$7.95 per hour

Production Volume

950 units

900 units

Labor Usage

$96,000

$97,000

Research and Development Expense

$22,000

$25,000

15-2 Sales Volume and Flexible Budget Variances

(USE WORKSHEETS BELOW)

The following data apply to chairs made by the Western Chair Company.

Price and Variable Costs Per Unit:

Standard

Actual

Sales Price

$62.00

$60.00

Direct Materials Cost

16.00

16.34

Direct Labor Cost

12.00

10.92

Overhead Cost

14.00

14.20

General, Selling, and Administrative (G,S,&A) Cost

8.00

7.00

Expected Fixed Costs:

Manufacturing

$120,400

$114,000

General, Selling, and Administrative

67,000

69,000

Western planned to make and sell 43,000 chairs.It actually produced and sold 44,000 chairs.

Required

a.Prepare a pro forma income statement based on the static budget.

b.Prepare a pro forma income statement based on a flexible budget and compute the sales and variable cost volume variances.Indicate whether the variances are favorable or unfavorable and speculate as to what management position would be held responsible for each variance.

c.Prepare an income statement that shows the actual results, and compute the flexible budget variances.Indicate whether the variances are favorable or unfavorable and predict what management position would be held responsible for each variance.

15-1Work Paper

Item

Budget

Actual

Variance

F or UF

Selling and Admin. Exp.

$29,000

$27,000

Sales Revenue

$310,000

$325,000

Materials Price

$2.00 per lb.

$2.10 per lb.

Cost of Goods Sold

$125,000

$100,000

Materials Purchases

$250,000

$265,000

Materials Usage

6,000 lbs.

5,800 lbs.

Sales Price

$550 each

$500each

Labor Rate

$8.10 per hr.

$7.95 per hr.

Production Volume

950 units

900 units

Labor Usage

$96,000

$97,000

Research and Dev. Exp.

$22,000

$25,000


15-2 Work Papers

a. b.

Western Chair Company

Static Budget, Flexible Budget, Volume Variances

Static Budget

Flexible Budget

Volume Variances

F or UF

Number of Units

Sales Revenue

Variable Costs

Direct Material

Direct Labor

Overhead

G,S,&A

Contribution Margin

Fixed Costs

Manufacturing

G,S,&A

Net Income

15-2 Work Papersb. continued

c.

Western Chair Company

Flexible Budget, Actual Results, Flexible Budget Variances

Flexible Budget

Actual Results

Flex. Bud. Variances

F or UF

Number of Units

Sales Revenue

Variable Costs

Direct Material

Direct Labor

Overhead

G,S,&A

Contribution Margin

Fixed Costs

Manufacturing

G,S,&A

Net Income

15-2 Work Papers c. continued

15-3 ROI and Residual Income

The Hydride Division of Murdoch Corporation is an investment center.It has $4,000,000 of operating assets.During 2010, the Hydride Division earned operating income of $720,000 on $12,000,000 of sales.Murdoch’s companywide return on investment (ROI) is approximately 14%.

Required

a.Compute the ROI for the Hydride Division.

b.Calculate the two ratios into which ROI can be subdivided, margin and turnover, for the Hydride Division.What useful information can management gain by analyzing these two performance measures?

c.Assume Murdoch uses ROI to rank managerial performance.The Hydride Division has the highest ROI in the company.Hydride’s nearest internal competitor is the NiCad Division, which has an average ROI of 17%.Murdoch needs to invest excess capital.The manager of the Hydride Division has the opportunity to expand existing capacity by investing an additional $3,000,000 in machinery.The expected ROI for the machinery investment is 15%.Should Hydride’s manager accept or reject the investment opportunity?Why?

d.Suppose Murdoch changes its performance assessment measure from ROI to residual income (RI).Murdoch’s desired rate of return is 14%.Under these circumstances, should Hydride’s manager accept or reject the opportunity to invest the additional $3,000,000 in machinery as described in requirement c?

Demonstration Problem 15-3 Work Papers

a.

ROI for Hydride Division

=

=

b.

Margin

=

=

Turnover

=

=

Margin

x

Turnover

=

ROI

x

=

c.

Hydride Division ROI with Additional Investment

Operating income

=

=

Operating assets

*Operating income from additional investment:

d.

Residual Income without Additional Investment

Operating income

(Operating assets x Desired ROI)

=

RI

=

=

Residual Income with Additional Investment

Operating income

(Operating assets x Desired ROI)

=

RI

=

=

 
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