Accounting
27th Edition
ISBN: 9781337272094
Author: WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher: Cengage Learning,
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Textbook Question
Chapter 23, Problem 23.23.4CP
Variance interpretation
You have been asked to investigate some cost problems in the Assembly Department of Ruthenium Electronics Co., a consumer electronics company. To begin your investigation, you have obtained the following budget performance report for the department for the last quarter.
| Ruthenium Electronics Co.—Assembly Department Quarterly Budget Performance Report | |||
| Standard Quantity at Standard Rates | Actual Quantity at Standard Rates | Quantity Variances | |
| Direct labor | $157,500 | $227,500 | $ 70,000 U |
| Direct materials | 297,500 | 385,000 | 87,500 U |
| Total | $455,000 | $612,500 | $157,500 U |
You also obtained the following reports:
| Ruthenium Electronics Co.—Purchasing Department Quarterly Budget Performance Report | |||
| Actual Quantity at Standard Rates | Actual Quantity at Actual Rates | Price Variance | |
| Direct materials | $437,500 | $385,000 | $(52,500) F |
| Ruthenium Electronics Co.—Fabrication Department Quarterly Budget Performance Report | |||
| Standard Quantity at Standard Rates | Actual Quantity at Standard Rates | Quantity Variances | |
| Direct labor | $245,000 | $203,000 | $(42,000) F |
| Direct materials | 140,000 | 140,000 | 0 |
| Total | $385,000 | $343,000 | $(42,000) F |
You also interviewed the Assembly Department supervisor. Excerpts from the interview follow:
Q: What explains the poor performance in your department?
A: Listen, you’ve got to understand what it’s been like in this department recently. Lately, it seems no matter how hard we try, we can’t seem to make the standards. I’m not sure what is going on, but we’ve been having a lot of problems lately.
Q: What kind of problems?
A: Well, for instance, all this Quarter we’ve been requisitioning purchased parts from the material storeroom, and the parts just didn’t fit together very well. I’m not sure what is going on, but during most of this quarter, we’ve had to scrap and sort purchased parts—just to get our assemblies put together. Naturally, all this takes time and material. And that’s not all.
Q: Go on.
A: All this Quarter the work we've been receiving from the Fabrication Department has been shoddy. I mean, maybe around 20% of the stuff that comes in from Fabrication just can’t be assembled. The fabrication is all wrong. As a result we've had to scrap and rework a lot of the stuff. Naturally, this has just shot our quantity variances.
Interpret the variance reports in light of the comments by the Assembly Department supervisor.
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AirPro Corporation reports the following for this period.
Actual total overhead
Standard overhead applied
Budgeted (flexible) variable overhead rate
Budgeted fixed overhead
Predicted activity level
Actual activity level
Volume variance
$ 28,225
$ 31,620
Volume Variance
$ 2.10 per unit
$ 11,500
Compute the volume variance and identify it as favorable or unfavorable.
11,500 units
10,200 units
Preparing a Flexible Budget for Performance Reporting
Suppose you receive the following performance report from the accounting department for your first month as plant manager for a new company. Your supervisor, the vice president of manufacturing, has concerns that the report does not provide an accurate picture of your
performance in the area of cost control.
Actual
Budgeted Variance
Units
Costs:
10,000
12,000
2,000 U
Direct materials
$358,800
Direct labor
$414,600
Variable manufacturing overhead
$216,000
Fixed manufacturing overhead
Total costs
$432,000 $73,200 F
$518,400 $103,800 F
$259,200 $43,200 F
$450,000 $432,000 $18,000 U
$1,439,400 $1,641,600 $202,200 F
REQUIRED
Prepare a variance analysis
Note: Do not use negative signs with your answers.
Static Budget Activity Variance
Flexible Budget Flexible Budget Variance
Units (in cases)
12,000
10,000
Actual
10,000 ✓
Static (Total) Variance
Costs:
Direct materials
Direct labor
Variable overhead $
$
432,000
$
$
504,000 x $
360,000 * F…
Chapter 23 Solutions
Accounting
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What is variance analysis?; Author: Corporate finance institute;https://www.youtube.com/watch?v=SMTa1lZu7Qw;License: Standard YouTube License, CC-BY