Chapter 11, Problem 55C

1.

To determine

Prepare a new contribution report for the month of April based on a flexible budget.

Explanation of Solution

Flexible Budget: A flexible budget is a budget that is prepared for different levels of the output. In other words, it is a budget that adjusts according to the changes in the volume of the activity. The main purpose of preparing flexible budget is to determine the differences among standard and actual result.

Prepare a new contribution report for April based on a flexible budget as follows:

Particulars	Flexible budget	Actual	Variance $\left(A-B\right)$
	450,000 Units (In pounds) (A)	450,000 Units (In pounds) (B)
Revenue	$3,600,000	$3,555,000	$  45,000 U
Less: Variable costs
Direct material	652,500	865,000	212,500 U
Direct labor	378,000	348,000	30,000 F
Variable overhead	729,000	750,000	21,000 U
Total variable costs	$1,759,500	$1,963,000	$203,500 U
Contribution margin	$1,840,500	$1,592,000	$248,500 U

Table (1)

Working note (1):

Compute the flexible budget:

Particulars	Static budget for 400,000 units (In Pounds) (a)	$\left(\frac{\text{450,000}}{\text{400,000}}\right)$ (b)	Flexible budget for 450,000 units (In Pounds)$\left(\text{a}\times \text{b}\right)$
Revenue	$3,200,000	1.125	$3,600,000
Direct material	580,000	1.125	652,500
Direct labor	336,000	1.125	378,000
Variable overhead	648,000	1.125	729,000
Total variable costs	$1,564,000	1.125	$1,759,500

Table (2)

2.

To determine

State the total contribution margin in the flexible budget column of the new report prepared under requirement (1).

Explanation of Solution

The total contribution margin on the flexible budget is $1,840,500$\left(\text{1,636,000}\times \text{1}\text{.125}\right)$.

3.

To determine

Describe the meaning of the total contribution margin in the flexible budget column of the new report prepared for the month of April.

Explanation of Solution

In this case, the unit sales price and unit variable costs had all remained same at their budgeted levels, however the sales volume has been increased from 400,000 units to 450,000 units, as a result this would in turn increases the contribution margin to $1,840,500$\left(\text{1,636,000}\times \text{1}\text{.125}\right)$.

4.

To determine

Ascertain the total variance between the flexible budget contribution margin and the actual contribution margin of the new report prepared from requirement (1) and calculate the following variances in order to explain this total contribution margin variance.

1. a. Direct-material price variance.
2. b. Direct-material quantity variance.
3. c. Direct-labor rate variance.
4. d. Direct-labor efficiency variance.
5. e. Variable-overhead spending variance.
6. f. Variable-overhead efficiency variance.
7. g. Sales-price variance.

Explanation of Solution

The variance between the flexible budget contribution margin and the actual contribution margin is $248,500 U.

Calculate the following variance to verify this $248,500 Unfavorable variance between the flexible budget and actual contribution margin (computed in requirement 1).

1. a. Compute the direct material price variance:

Type of Material	Actual quantity (a)	Actual price (2) –standard price (b)	Variance$\text{(a}-\text{b)}$
Cookie mix	4,650,000	$\left(\$.02-\$.02\right)$	0
Milk chocolate	2,660,000	$\left(\$.20-\$.15\right)$	133,000 U
Almonds	480,000	$\left(\$.50-\$.50\right)$	0
Total			$133,000 U

Table (3)

Working note (2):

Compute the actual price:

Type of Material	Actual quantity (a)	Actual Cost (b)	Actual price $\left(\frac{\text{b}}{\text{a}}\right)$
Cookie mix	4,650,000	$93,000	0.02
Milk chocolate	2,660,000	532,000	0.20
Almonds	480,000	240,000	0.50

Table (4)

1. b. Compute the direct material quantity variance:

Type of Material	Standard price (a)	Actual quantity–Standard quantity (3) (b)	Variance$\text{(a}-\text{b)}$
Cookie mix	$0.2	$\left(\$4,650,000-\$4,500,000\right)$	0
Milk chocolate	$0.15	$\left(\$2,660,000-\$2,250,000\right)$	133,000 U
Almonds	$0.50	$\left(\$480,000-\$450,000\right)$	0
Total			$133,000 U

Table (5)

Working note (3):

Compute the standard quantity:

Type of Material	Actual pounds produced (a)	Standard unit(b)	Standard quantity $\text{(a}\times \text{b)}$
Cookie mix	10 Oz	450,000	4,500,000
Milk chocolate	5Oz	450,000	2,250,000
Almonds	1 Oz	450,000	450,000

Table (5)

1. c. Compute the direct labor rate variance:

The direct labor rate variance is zero. Because when dividing the total actual labor cost by the actual labor time used, for each type of labor, it shows that the actual rate and the standard rate are the same.

1. d. Compute the direct labor efficiency variance:

Type of Material	Standard rate per minute (a)	Actual hour–Standard hour (4) (b)	Variance$\text{(a}-\text{b)}$
Mixing	$0.24 $\left(\frac{\$2.4}{1\text{ mins}}\right)$	$\left(\$450,000-\$450,000\right)$	0
Baking	$0.30$\left(\frac{\$0.60}{2\text{mins}}\right)$	$\left(\$800,000-\$900,000\right)$	133,000 U
Total			$133,000 U

Table (6)

Working note (3):

Compute the standard hour:

Type of Material	Standard unit (a)	Standard minute per unit (b)	Standard hour$\text{(a}\times \text{b)}$
Mixing	450,000	1 minute	450,000
Baking	450,000	2 minute	900,000

Table (7)

1. e. Compute the variable overhead spending variance:

$\begin{array}{c} \begin{array}{l}\text{Variable-overhead}\\ \text{spending variance}\end{array}\}=\text{Actual variable-overhead}-\left(\begin{array}{l}\text{Actual quantity}\times \\ \text{Standard variable rate}\end{array}\right)\\ =\$750,000-\left(\frac{450,000\text{mins}+800,000\text{mins}}{60\text{ minutes}}\times \$32.40\right)\\ =\$750,000-\$675,000\\ =\$75,000\text{U}\end{array}$

1. f. Compute the variable overhead efficiency variance:

$\begin{array}{c} \begin{array}{l}\text{Variable-overhead}\\ \text{efficiency variance}\end{array}\}=\text{Standard variable rate}-\left(\begin{array}{l}\text{Actual quantity}\times \\ \text{Standard quantity}\end{array}\right)\\ =\$32.40-\left(\frac{450,000\text{mins}}{60\text{ minutes}}-\frac{3\times 450,000\text{mins}}{60\text{ minutes}}\right)\\ =\$54,000\text{ F}\end{array}$

1. g. Compute the sales price variance:

$\begin{array}{c} \text{Sales price variance}\}=-\left(\begin{array}{l}\text{Actual sales price}-\\ \text{Budgeted sales price}\end{array}\right)\times \text{Actual sales volume}\\ =\left(\frac{\$\text{3,555,000}}{450,000\text{ units sold}}-\$8.00\right)\times 450,000\\ =\$45,000\text{ U}\end{array}$

Total variance:

Particulars	Amounts in ($)
Direct-material price variance	$133,000 U
Direct-material quantity variance	79,500 U
Direct-labor rate variance	0
Direct-labor efficiency variance	30,000 F
Variable-overhead spending variance	75,000 U
Variable-overhead efficiency variance	54,000 F
Sales-price variance	45,000 U
Total	$248,500 U

Table (8)

5. a

To determine

Describe the problems that the company might face when using direct-labor hours as the basis for applying Overhead.

Explanation of Solution

The company might face the problem of inappropriate cost driver when using direct-labor hours as the basis for applying Overhead. Because, direct-labor hours is the activity that may not drives variable overhead. Moreover, this could be experienced in the variance analysis. In the variance analysis the direct-labor efficiency variance is favorable, whereas the variable-overhead spending variable is unfavorable.  Likewise, the baking substantially requires more power than mixing does. Thus these differences could distort product costs.

5. b

To determine

Describe the manner in which the activity-based costing (ABC) would solve the problems described in requirement (5a).

Explanation of Solution

The company should consider activity-based costing (ABC) as an alternative. In this case, the direct labor does not seem to have a direct cause-and-effect relationship with variable overhead. Therefore the company should try to identify the activity or activities that drive variable overhead. The activity-based costing may not be beneficial if the same proportion of these activities is used in all the products of the company. Thus, the activity-based costing (ABC) could only be beneficial if the products require a different mix of these activities.