Chapter 14, Problem 49P

1.

To determine

Prepare a profit-variance report and compute the total flexible-budget variance and the sales volume variance for Company P’s operations in August 2016

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared.

Profit variance is the difference between actual profit witnessed and the level of profit being budgeted.

Variances consist of differences between financial budgeting and actualization amounts.

A variance in budget is the difference in the amount of expense or revenue budgeted or baseline, and the actual amount. The variance in budget is favorable if the actual revenue is higher than the budget or if the actual expense is less than the budget.

The difference between the actual operating income and the operating income of the master budget is called the total variance in operating income. This variance also referred to as a master (static) variance of the budget for the period.

OR

The total variance of a period's operating income is the difference between the period’s actual operating income and the period’s budgeted operating income; also called the period's master (static) budget variance.

A flexible-budget (FB) variance for any item on the revenue statement specifies the difference between the actual amount of this item and the budget-flexible amount for that item.

Calculate master budget:

Particulars		Amount
Number of apartments rented		100
Revenue per apartment rented	$700 ÷ 2	$350
Total revenue		$35,000
Less: Variable costs:
Professional labor:
(1.5 hr./application × $20/hr.) × 300 applicants	$9,000
Credit check: $50/appl. × 300 applicants	15,000	24,000
Contribution margin		$11,000
Less: Other expenses (lease, secretarial help, utilities)		3,000
Operating income		$8,000

Calculate flexible budget:

Particulars		Amount
Total revenue 90 rentals × $350/rental		$31,500
Less: Variable costs:
Total revenue
Professional labor (1.5 × $20) × 270 applications	$8,100
Credit check $50/applicant × 270 applications	13,500	21,600
Contribution margin		$9,900
Less: Other expenses		3,000
Operating income		$6,900

Calculate operating income:

Particulars		Amount
Total revenue 90 rentals × $800/rental × 0.5		$36,000
Less: Variable costs:
Total revenue
Professional labor	$9,500
Credit check $55/applicant × 270 applications	14,850	24,350
Contribution margin		$11,650
Less: Other expenses		3,600
Operating income		$8,050

Particulars	Actual Results	Flexible budget Variances	Flexible Budget	Sales Volume Variance	Static (master) budget
Unit sold	90	0	90	10 U	100
Revenues	$36,000	$4,500 F	$31,500	$3,500 U	$35,000
Professional labor	$9,500	$1,400 U	$8,100	$900 F	$9,000
Credit check	$14,850	$1,350 U	$13,500	$1,500 F	$15,000
Contribution margin	$11,650	$1,750 F	$9,900	$1,100 U	$11,000
Fixed costs	$3,600	$600 U	$3,000	0	$3,000
Operating income	$8,050	$1,150 F	$6,900	$1,100 U	$8,000

The formula to calculate total master (static) budget variance is as follows:

$\text{Total master (static) budget variance}=\text{Actual results}-\text{Static master budget}$

Calculate total master (static) budget variance:

$\begin{array}{c}\text{Total master (static) budget variance}=\text{\$8,050}-\text{\$}8,000\\ =\$50\text{ F}\end{array}$

The formula to calculate flexible-budget variance is as follows:

$\text{Flexible budget variance}=\text{Actual results}-\text{Flexible budget}$

Calculate flexible-budget variance:

$\begin{array}{c}\text{Flexible budget variance}=\text{\$8,050}-\text{\$}6,900\\ =\$1,150\text{ F}\end{array}$

The variance in the sales volume is the difference between the flexible operating budget income and the master budget operating income for that period. The variance in sales volume represents the impact of selling a different volume of sales on operating profit as compared to the volume budgeted reflected in the master budget.

The formula to calculate the sales volume variance is as follows:

$\text{Sales volume variance}=\text{Flexible budget}-\text{Master budget}$

Calculate the sales volume variance:

$\begin{array}{c}\text{Sales Volume variance}=\text{\$6,900}-\text{\$8},000\\ =\$1,100\text{ U}\end{array}$

2.

To determine

Compute the professional labor rate and labor efficiency variances for August 2016.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared.

Variances consist of differences between financial budgeting and actualization amounts.

A variance in budget is the difference in the amount of expense or revenue budgeted or baseline, and the actual amount. The variance in budget is favorable if the actual revenue is higher than the budget or if the actual expense is less than the budget.

The variance in the direct labor rate (RV) is the difference between the actual and standard rate of pay multiplied by actual direct wage working hours were over the period.

Actual Labor cost is $9,500.

Calculate flexible budget amount at standard cost:

$\begin{array}{c}\text{Flexible budget amount at standard cost}=\text{AQ}\times \text{SP}\\ =400\text{ hrs}\times \text{\$20/hr}\\ =\$8,000\end{array}$

Calculate labor rate variance:

$\begin{array}{c}\text{Labor rate variance}=\text{Actual labor cost}-\text{Flexible budget at standard cost}\\ =\$9,500-\$8,000\\ =\$1,500\text{ U}\end{array}$

Hence, the labor rate variance is $1,500 U.

The direct labor efficiency variance (EV) is the difference between the actual hours worked and the standard hours allowed units produced, multiplied by the standard rate of pay.

Calculate flexible budget amount at standard cost:

$\begin{array}{c}\text{Flexible budget amount at standard cost}=\text{AQ}\times \text{SP}\\ =400\text{ hrs}\times \text{\$20/hr}\\ =\$8,000\end{array}$

Calculate flexible budget amount based on outputs:

$\begin{array}{c}\text{Flexible budget amount}=\text{SQ}\times \text{SP}\\ =(270\times 1.5\text{ hrs)}\times \text{\$20/hr}\\ =\$8,100\end{array}$

Calculate labor efficiency variance:

$\begin{array}{c}\text{Labor efficiency variance}=\text{Flexible budget amount at standard cost}-\text{Flexible budget amount}\\ =\$8,000-\$8,100\\ =\$100\text{ F}\end{array}$

Hence, the labor efficiency variance is $100 F.

Calculate total flexible budget variance for professional labor:

Actual Labor cost is $9,500.

Calculate flexible budget amount based on outputs:

$\begin{array}{c}\text{Flexible budget amount}=\text{SQ}\times \text{SP}\\ =(270\times 1.5\text{ hrs)}\times \text{\$20/hr}\\ =\$8,100\end{array}$

The total flexible budget variance for professional labor:

$\begin{array}{c}\text{Total flexible budget variance}=\text{Actual labor cost}-\text{Flexible budget amount}\\ =\$9,500-\$8,100\\ =\$1,400\text{ U}\end{array}$

3.

To determine

Mention the non-financial factors that will be considered by Company, P in evaluating the effectiveness and efficiency of professional labor.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared.

Variances consist of differences between financial budgeting and actualization amounts.

A variance in budget is the difference in the amount of expense or revenue budgeted or baseline, and the actual amount. The variance in budget is favorable if the actual revenue is higher than the budget or if the actual expense is less than the budget.

The variance in the direct labor rate (RV) is the difference between the actual and standard rate of pay multiplied by actual direct wage working hours were over the period.

The direct labor efficiency variance (EV) is the difference between the actual hours worked and the standard hours allowed units produced, multiplied by the standard rate of pay.

The following are the factors that will be considered in evaluating the effectiveness of professional labor:

• Number of suitable units rented
• Number of candidates
• Application for apartments in the area
• Total number of rentable apartments in the area
• Quality (applicant credit rating)