1. Managerial accounting
Charles E. Davis
Elizabeth Davis
Performance Evaluation:
Variance Analysis

2. Flexible Budgets: A Performance Evaluation Tool
Variance Analysis: Direct Materials
Variance Analysis: Direct Labor
Variance Analysis: Overhead

3. Flexible Budgets: A Performance Evaluation Tool
1. What is a static budget? When is it prepared? 2. What is a favorable variance? An unfavorable variance? 3. What is management by exception? 4. What is a flexible budget? How does it differ from a static budget? 5. Describe the two components of the static budget variance.

4. Exercise 1
Rogers Sports sells volleyball kits that it purchases from a sports equipment distributor. The following static budget based on sales of 2,000 kits was prepared for the year. Fixed operating expenses account for 80% of total operating expenses at this level of sales.
Sales revenue $100,000
Cost of goods sold (all variable) ,000
Gross margin ,000
Operating expenses 35,000
Operating income $ 5,000
Required
Prepare a flexible budget based on sales of 1,500, 2,500, and 3,500 units.

5. Exercise 2
Refer to the data in Exercise 6-1. Assume that during the year Rogers Sports actually sold 2,100 volleyball kits during the year at a price of $48 per kit. Required Calculate the sales volume variance for sales revenue and cost of goods sold.

6. Exercise 3
Refer to the data in Exercise 6-1. Assume that during the year Rogers Sports actually sold 2,100 volleyball kits during the year at a price of $48 per kit. Required Calculate the sales price variance.

7. Problem 27
Barnes Entertainment Corporation prepared a master budget for the month of November that was based on sales of 150,000 board games. The budgeted income statement for the period is as follows.

8. Problem 27
During November, Barnes produced and sold 180,000 board games. Actual results for the month are as follows.

9. Problem 27
a. Prepare a flexible budget for November. b. Calculate Barnes’s static budget variance for November. c. Will the static budget variance that you calculated in part (b) be useful to management? Why or why not? d. Based on the available information, prepare a performance report for management. e. Comment on the results of your report.

10. Unit
180,000 games
Sales revenue
$16.00
$2,880,000
Less variable expenses:
Direct material
4.50
810,000
Direct labor
2.00
360,000
Variable overhead
3.00
540,000
Total variable expenses
9.50
1,710,000
Contribution margin
$6.50
1,170,000
Less fixed expenses:
Overhead
250,000
Selling and administrative expenses
500,000
Total fixed expenses
750,000
Operating income
$420,000

11. Static Budget Variance
Actual Results
Static Budget Variance
Static Budget
Unit Sales
180,000
30,000 F
150,000
Sales revenue
$2,870,000
$470,000 F
$2,400,000
Less variable expenses:
Direct material
798,000
123,000 U
675,000
Direct labor
375,000
75,000 U
300,000
Overhead
550,000
100,000 U
450,000
Total variable expenses
1,723,000
298,000 U
1,425,000
Contribution margin
1,147,000
172,000 F
975,000
Less fixed expenses:
270,000
20,000 U
250,000
Selling and administrative
500,000
Total fixed expenses
770,000
750,000
Operating income
$377,000
$152,000 F
$225,000

12. Flexible Budget Variance
Actual Results
Flexible Budget Variance
Flexible Budget
Sales Volume Variance
Static Budget
Unit Sales
180,000
30,000 F
150,000
Sales revenue
$2,870,000
$10,000 U
$2,880,000
$480,000 F
$2,400,000
Less variable expenses:
Direct material
798,000
12,000 F
810,000
135,000 U
675,000
Direct labor
375,000
15,000 U
360,000
60,000 U
300,000
Overhead
550,000
10,000 U
540,000
90,000 U
450,000
Total variable expenses
1,723,000
13,000 U
1,710,000
285,000 U
1,425,000
Contribution margin
1,147,000
23,000 U
1,170,000
195,000 F
975,000
Less fixed expenses:
270,000
20,000 U
250,000
Selling & administrative
500,000
Total fixed expenses
770,000
750,000
Operating income
$377,000
$43,000 U
$420,000
$195,000 F
$225,000

13. Variance Analysis: Direct Materials
1. What is a direct materials price variance? 2. What is a direct materials quantity variance? 3. Define the standard quantity allowed. 4. In your own words, explain the standard quantity of tires allowed for eight bicycles. Why does your answer not depend on the number of bicycles expected to be produced? 5. Give two reasons why actual prices might differ from standard prices, resulting in a direct materials price variance. 6. Give two reasons why actual materials usage might differ from standard materials usage, resulting in a direct materials quantity variance.

14. Exercise 6
Washington WaterWorks manufactures snorkel gear. During the past month, Washington purchased 4,000 pounds of plastic to use in its dive masks, at a cost of $6,800. The standard price for the plastic is $1.60 per pound. The company actually used 3,800 pounds of the plastic to produce 15,000 dive masks. Required Calculate Washington’s direct materials price variance for the month.

15. Exercise 9
TechSolvers produces 8-foot USB cables. During the past year, the company purchased 500,000 feet of plasticcoated wire at a price of $0.25 per foot. The direct materials standard for the cables allows 8.5 feet of wire at a standard price of $0.23. During the year, the company used a total of 535,000 feet of wire to produce 63,000 8-foot cables. Required Calculate TechSolvers’ direct materials quantity variance for the year.

16. Exercise 13
The following information is available for Chad’s Chocolates: Actual production 2,800 boxes Budgeted production 3,200 boxes Direct Materials Standard 1.5 pounds of chocolate per $8.00 per pound Actual 6,000 pounds $7.70 per pound 5,040 pounds $7.70 per pound Required a. Calculate the direct materials price and quantity variances. b. What might have caused the variances you calculated?