11-55

Managerial Accounting Chapter 11

CHAPTER 11: CASE STUDY 11-55Comprehensive Variance Analysis

Used to Explain Operational ResultsRene Morel

Embry-Riddle Aeronautical University Online

MBAA 517Instructor: Dr. Ana Machuca


Aunt Molly’s Old Fashioned Cookies bakes cookies for retail stores. The company’s best-selling cookie is chocolate nut supreme, which is marketed as a gourmet cookie and regularly sells for $8.00 per pound. The standard cost per pound of chocolate nut supreme, based on Aunt Molly’s normal monthly production of 400,000 pounds, is as follows:

StandardCost Item Quantity Unit Cost Total Cost

Direct Materials: Cookie Mix 10 oz. 0.02 per oz. $ 0.20 Milk Chocolate 5 oz. 0.15 per oz. $ 0.75 Almonds 1 oz. 0.50 per oz. $ 0.50

$ 1.45 Direct labor Mixing 1 min 14.40 per hr. $ 0.24 Baking 2 min 18.00 per hr. $ 0.60

$ 0.84

Variable Overhead 3 min 32.40 per hr. $ 1.62 Total standard cost per pound $ 3.91

Aunt Molly’s management accountant, Karen Blair, prepares monthly budget reports based on these standard costs. April’s contribution report, which compares budgeted and actual performance, is shown in the following schedule.

Contribution Report for April

StaticBudget Actual Variance

Units (in pounds) 400,000 450,000 50,000

Revenue $ 3,200,000.00 $ 3,555,000.00 $ 355,000.00 Direct material $ 580,000.00 $ 865,000.00 $ 285,000.00 Direct labor $ 336,000.00 $ 348,000.00 $ 12,000.00 Variable overhead $ 648,000.00 $ 750,000.00 $ 102,000.00 Total variable costs $ 1,564,000.00 $ 1,963,000.00 $ 399,000.00 Contribution margin $ 1,636,000.00 $ 1,592,000.00 $ 44,000.00


Justine Madison, president of the company, is disappointed with the results. Despite a sizable increase in the number of cookies sold, the product’s expected contribution to the overall profitability of the firm decreased. Madison has asked Blair to identify the reason why the contribution margin decreased. Blair has gathered the following information to help in her analysis of the decrease.

Usage Report for February

Cost Item Quantity Actual Cost

Direct Materials: Cookie Mix 4,650,000 $ 93,000.00 Milk Chocolate 2,660,000 $ 532,000.00 Almonds 480,000 $ 240,000.00 Direct Labor: Mixing 450,000 $ 108,000.00 Baking 800,000 $ 240,000.00 Variable Overhead $ 750,000.00 Total Variable Costs $ 1,963,000.00

Required:

1. Prepare a new contribution report for April in which:

The static budget column in the contribution report is replaced with a flexible budget column.

The variances in the contribution report are recomputed as the difference between the flexible budget and actual columns.

First, I performed a Contribution report for 400,000 and then for 450,000 pounds.


April Contribution Report

Quantity Standard Standard Cost ActualActual Cost

Actual Total Cost

Revenue 400,000 $8.00 $3,200,000.00 450,000 $7.90 $3,555,000.00 Units (in pounds) 400,000 450,000 Direct Materials:

Cookie Mix 4,000,000 $0.02 $80,000.004,650,00

0 $0.02 $93,000.00

Milk Chocolate 2,000,000 $0.15 $300,000.002,660,00

0 $0.20 $532,000.00 Almonds 400,000 $0.50 $200,000.00 480,000 $0.50 $240,000.00 $580,000.00 $865,000.00 Direct labor Mixing 400,000 $0.24 $96,000.00 450,000 $0.24 $108,000.00 Baking 800,000 $0.30 $240,000.00 800,000 $0.30 $240,000.00 $336,000.00 $348,000.00 Variable Overhead 400,000 $1.62 $648,000.00 450000 $1.67 $750,000.00 $648,000.00 $750,000.00 $1,564,000.00 $1,963,000.00

Contribution Margin $1,636,000.00 $1,592,000.00


April Contribution Report

QuantityStandar

dStandard

Cost ActualActual Cost

Actual Total Cost

Revenue 450,000 $8.00$3,600,000.0

0 450,000 $7.90 $3,555,000.00 Units (in pounds) 450,000 450,000 Direct Materials:

Cookie Mix 4,500,000 $0.02 $90,000.004,650,00

0 $0.02 $93,000.00

Milk Chocolate 2,250,000 $0.15 $337,500.002,660,00

0 $0.20 $532,000.00 Almonds 450,000 $0.50 $225,000.00 480,000 $0.50 $240,000.00 $652,500.00 $865,000.00 Direct labor Mixing 450,000 $0.24 $108,000.00 450,000 $0.24 $108,000.00 Baking 900,000 $0.30 $270,000.00 800,000 $0.30 $240,000.00 $378,000.00 $348,000.00 Variable Overhead 450,000 $1.62 $729,000.00 450000 $1.67 $750,000.00 $729,000.00 $750,000.00

$1,759,500.0

0 $1,963,000.00

Contribution Margin

$1,840,500.00 $1,592,000.00

2. What is the total contribution margin in the flexible budget column of the new report prepared for requirement (1)?

For 400,000 pounds: $1,636,000.00

For 450,000 pounds: $1,840,500.00


3. Explain (i.e., interpret) the meaning of the total contribution margin in the flexible budget column of the new report prepared for requirement (1).

The use of a Flexible budget is very good in means of representing everything as a standard cost. It is a measure of controlling variable costs and measuring towards a standard. If the results for the actual budget where as the flexible budget, the contribution margin should have been more.

4. What is the total variance between the total variance between the flexible budget contribution margin and the actual contribution margin in the new report prepared for requirement (1)? Explain this total contribution margin variance by computing the following variances. (Assume that all materials are used in the month of purchase.)

a. Direct-material price variance.

Direct materials:Cookie Mix: Flexible=$0.02, Actual=$0.02, 4,650,000 x ($0.00)=$0.00Milk Chocolate: Flexible=$0.15, Actual=$0.20, 2,660,000 x ($0.05) = $133,000 UAlmonds: Flexible=$0.50, Actual=$0.50, 480,000 x ($0.00)=$0.00Total: $133,000.00 U

b. Direct-material quantity variance.

Direct Materials:

Cookie Mix4,500,00

0 $0.02 $90,000.004,650,00

0 $0.02 $93,000.00

Milk Chocolate2,250,00

0 $0.15 $337,500.002,660,00

0 $0.20 $532,000.00 Almonds 450,000 $0.50 $225,000.00 480,000 $0.50 $240,000.00 $652,500.00 $865,000.00

150,000 x ($0.02) = $3,000.00410,000 x ($0.15) = $61,500.0030,000 x ($0.50) = $15,000.00Total variance: $79,500.00

Or, $865,000-$652,500.00=$79,500.00

c. Direct-labor rate variance.

The direct-labor rate is equal to zero.

d. Direct-labor efficiency variance.


Direct labor Mixing 450,000 $0.24 $108,000.00 450,000 $0.24 $108,000.00 Baking 900,000 $0.30 $270,000.00 800,000 $0.30 $240,000.00 $378,000.00 $348,000.00

$378,000-$348,000=$30,000.00 Favorable

e. Variable-overhead spending variance.

$750,000-($1,250,000/60x$32.40hr)=$75,000.00 Unfavorable

f. Variable-overhead efficiency variance.

$32.40 x [($1,250,000/60) – (450,000lbsx3min/60)] = $54,000.00 Favorable

g. Sales-price variance.

Revenue 450,000 $8.00$3,600,000.0

0 450,000 $7.90 $3,555,000.00

$0.10x450,000=$45,000.00 Unfavorable

5. a. Explain the problem that might arise in using direct-labor hours as the basis for applying overhead.

It seems that direct labor is not a good indicator to calculate overhead. Direct labor does not seem to be the cost driver for the overhead. One is not dependent on the other.

b. How might activity-based costing (ABC) solve the problems described in requirement 5a?

ABC might be a better solution to find out the real cost drivers for the overhead. By studying the activities involved in driving the overhead cost, the company can better understand what is driving overhead.

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