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 |
|
|
– |
|
= |
|
|
|
– |
|
= |
|
|
|
|
|
|
|
|
|
|
|
