Flexible Budgets and Standard Cost Systems

Question: Use the following information to prepare a standard cost income statement for Mitchell Company for 2018. 

Cost of Goods Sold (at standard) \( 366,000 

Direct Labor Efficiency Variance \) 19,500 F 

Sales Revenue (at standard) 570,000 

Variable Overhead Efficiency Variance 3,300 U 

Direct Materials Cost Variance 7,200 U 

Fixed Overhead Volume Variance 12,500 F 

Direct Materials Efficiency Variance 2,700 U 

Selling and Administrative Expenses 71,000 

Direct Labor Cost Variance 42,000 U 

Variable Overhead Cost Variance 1,700 F 

Fixed Overhead Cost Variance 2,100 F

Office Plus sells its main product, ergonomic mouse pads, for \(13 each. Its variable cost is \)5.10 per pad. Fixed costs are \(205,000 per month for volumes up to 65,000 pads. Above 65,000 pads, monthly fixed costs are \)250,000. Prepare a monthly flexible budget for the product, showing sales revenue, variable costs, fixed costs, and operating income for volume levels of 45,000, 55,000, and 75,000 pads.

Murphy Company managers received the following incomplete performance report:

Units Actual Results Flexible Budget Variance Static Budget Flexible Budget Sales Volume Variance Sales Revenue Contribution Margin Fixed Expenses Operating Income 35,000 (a) (b) 5,000 F \( 29,000 \) 14,000 105,000 0 \( 219,000 \) 27,000 F 85,000 13,000 MURPHY COMPANY Flexible Budget Performance Report For the Year Ended July 31, 2018 134,000 14,000 35,000 \( 35,000 100,000 \) 219,000 84,000 135,000 (c) (d) (e) (f) (h) (g) (i) (j) (k) (l)

Complete the performance report. Identify the employee group that may deserve praise and the group that may be subject to criticism. Give your reasoning.

Question: Top managers of Marshall Industries predicted 2018 sales of 14,800 units of its product at a unit price of \(9.50. Actual sales for the year were 14,600 units at \)12.00 each. Variable costs were budgeted at \(2.00 per unit, and actual variable costs were \)2.10 per unit. Actual fixed costs of \(48,000 exceeded budgeted fixed costs by \)4,000. 

Prepare Marshall’s flexible budget performance report. What variance contributed most to the year’s favorable results? What caused this variance?

List the eight product variances and the manager most likely responsible for each.

Matthews Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2018, using 143,000 square feet of extruded vinyl purchased at \(1.30 per square foot. Production required 400 direct labor hours that cost \)16.00 per hour. The direct materials standard was seven square feet of vinyl per fender, at a standard cost of \(1.35 per square foot. The labor standard was 0.028 direct labor hour per fender, at a standard cost of \)15.00 per hour. 

Compute the cost and efficiency variances for direct materials and direct labor. Does the pattern of variances suggest Matthews Fender’s managers have been making tradeoffs? Explain.

Question: Mills, Inc. is a competitor of Murry, Inc. from Exercise E23­18. Mills also uses a standard cost system and provides the following information: 

Static budget variable overhead \( 1,200 

Static budget fixed overhead \) 1,600 

Static budget direct labor hours 800 hours 

Static budget number of units 400 units 

Standard direct labor hours 2 hours per unit 

Mills allocates manufacturing overhead to production based on standard direct labor hours. Mills reported the following actual results for 2018: actual number of units produced, 1,000; actual variable overhead, \(4,000; actual fixed overhead, \)3,100; actual direct labor hours, 1,600.

Requirements 

1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume variances. 

2. Explain why the variances are favorable or unfavorable

The May 2018 revenue and cost information for McDonald Outfitters, Inc. follows: 

Sales Revenue (at standard) $ 610,000 

Cost of Goods Sold (at standard) 348,000 

Direct Materials Cost Variance 1,500 F 

Direct Materials Efficiency Variance 6,600 F 

Direct Labor Cost Variance 4,200 U 

Direct Labor Efficiency Variance 2,700 F 

Variable Overhead Cost Variance 2,800 U 

Variable Overhead Efficiency Variance 1,100  

Fixed Overhead Cost Variance 2,300 U 

Fixed Overhead Volume Variance 8,300 F 

Prepare a standard cost income statement for management through gross profit. Report all standard cost variances for management’s use. Has management done a good or poor job of controlling costs? Explain.

Headset manufactures headphone cases. During September 2018, the company produced 106,000 cases and recorded the following cost data:

Standard Cost Information

Actual Information

Requirements 

1. Compute the cost and efficiency variances for direct materials and direct labor.

2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

3. Headset’s management used better­quality materials during September. Discuss the trade­off between the two direct material variances.

Computing and journalizing standard cost variances

Middleton manufactures coffee mugs that it sells to other companies for customizing with their own logos. Middleton prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:

Actual cost and production information for July 2018 follows:

a. There were no beginning or ending inventory balances. All expenditures were on account.

b. Actual production and sales were 62,500 coffee mugs.

c. Actual direct materials usage was 11,000 lbs. at an actual cost of \)0.17 per lb.

d. Actual direct labor usage of 197,000 minutes at a cost of \(33,490.

e. Actual overhead cost was \)10,835 variable and \(29,965 fixed.

f. Selling and administrative costs were \)130,000.

Requirements

1. Compute the cost and efficiency variances for direct materials and direct labor.

2. Journalize the purchase and usage of direct materials and the assignment of direct

labor, including the related variances.

3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production from Work in Process Inventory. Journalize the adjusting of the Manufacturing Overhead account.

5. Middleton intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

Preparing a standard cost income statement Review your results from Problem P23­33B. 

Middleton’s actual and standard sales price per mug is $5. Prepare the standard cost income statement for July 2018.

Download an Excel template for this problem online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren. Pilchuck Company manufactures tote bags and has provided the following information for September 2018:

1. Requirements 
2. Prepare a flexible budget performance report, including the heading. Use the ABS function when calculating variances, and use the drop-down selections for F or U when describing the variances. 
3. Calculate the Static Budget Variance for operating income, and label it as a F (favorable) or U (unfavorable) variance.

Kellogg Company manufacturers and markets ready-to-eat cereal and convenience foods including Raisin Bran, Pop Tarts, Rice Krispies Treats, and Pringles. In addition to the raw materials used when producing its products, Kellogg Company also has significant labor costs associated with the products. As of January 2, 2016, Kellogg Company had approximately 33,577 employees. A shortage in the labor pool, regulatory measures, and other pressures could increase the company’s labor cost, having a negative impact on the company’s operating income. 

Requirements 

1. Suppose Kellogg Company noticed an increase in its actual direct labor costs compared to the budgeted amount. How could Kellogg Company investigate this? 

2. What is the direct labor cost variance and how would a company calculate this variance? 

3. What is the direct labor efficiency variance and how would a company calculate this variance? 

4. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor cost variance. What measures could Kellogg Company take to control this variance? 

5. Suppose that Kellogg Company found an unfavorable total direct labor variance that was due completely to the direct labor efficiency variance. What measures could Kellogg Company take to control this variance?

Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had recently been hired to update the accounting system and speed up the reporting process.

“What’s taking so long?” Drew asked. “When am I going to get the variance reports?” Jeff sighed and attempted to explain the problem. “Some of the variances appear to be way off. We either have a serious problem in production, or there is an error in the spreadsheet. I want to recheck the spreadsheet before I distribute the report.” Drew pulled up a chair, and the two men went through the spreadsheet together. The formulas in the spreadsheet were correct and showed a large unfavorable direct labor efficiency variance. It was time for Drew and Jeff to do some investigating.

After looking at the time records, Jeff pointed out that it was unusual that every employee in the production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no one ever five minutes late getting back from lunch? What about clean­up time between jobs or at the end of the day?

Drew began to observe the production laborers and noticed several disturbing items. One employee was routinely late for work, but his time card always showed him clocked in on time. Another employee took 10­ to 15­minute breaks every hour, averaging about 1  hours each day, but still reported eight hours of direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his time card showed him clocked in on time. No one in the production area ever reported any “down time” when they were not working on a specific job, even though they all took breaks and completed other tasks such as doing clean­up and attending department meetings.

Requirements 

1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?

2. How might an employee’s time card show the employee on the job and working when the team member was not present? 

3. Why would the employees’ activities be considered fraudulent?

In 75 words or fewer, explain what a cost variance is and describe its potential causes.