- 3 Donald Inc Is A Usa Based Manufacturing Company Which Focuses On The Production Of Fashionable Table Lamps Under The 1 (148.02 KiB) Viewed 19 times
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3. Donald Inc. is a USA based manufacturing company which focuses on the production of fashionable table lamps under the "Ambience" brand name. It produces two models: the 'Standard' and the 'Super'. While the company has been reasonably profitable in recent years the results have been variable. The CEO Tom Kerridge feels he is not fully in control of the company's finances. In particular he was disappointed with the latest results, which showed an operating loss. The company's system of budgetary control incorporates - on a marginal costing basis - standard product costs and detailed variance analysis. Standard product costs were calculated in 2018 in respect of the month of January 2019. They are shown below: Standard Ambience Usage Super Ambience Usage $/unit $/unit 42.00 51.80 Standard Selling Price Standard Variable costs Materials W $4.20 per lb 2.0 lbs 8.40 2.5 lbs 10.50 1.5 lbs 8.40 1.7 lbs 9.52 0.5 lbs 3.50 0.6 lbs 4.20 X $5.60 per lb Y $7.00 per lb Total Materials Direct Labour 20.30 24.22 $14.00 per hour 0.5hrs 7.00 0.6hrs 8.40 Variable Overheads $5.60 per direct labour hour 2.80 3.36 Packaging Price per unit 1.40 1.75 31.50 37.73 Standard Variable Cost Standard Contribution 10.50 14.07 Monthly Sales Targets 10.000 units 10,000 units Analysis of the results for January 2019 (shown in the table below) are based on the following information: ● 12,000 units of the Standard Ambience were sold, (at an average price of $37.80 per unit), but only 9,000 units of the Super were sold (at an average price of $47.60 per unit). ● 49,000 lbs of Material W were consumed at an average price of $3.15, 35,000 lbs of X at an average price of $6.30 and 10,500 lbs of Y at $7.21. ● Direct Labour consisted of 12,000 hours at $15.40 and Variable Overheads rate was $6.30. ● The actual cost of packaging was $37,800; the company's fixed expenses were $161,000 (compared with $140,000 originally budgeted). ● You also discover that the market changed in early 2019, so following the market trend, prices for the two categories of Ambience could have been Standard $39.20 and Super $46.20.
Variance analysis report Units Produced & Sold Standard Ambience Super Ambience Total Units Income statement Sales Revenue Standard Ambience Super Ambience Total Sales Revenue Variable Costs Materials W X Y Total Materials Direct Labour Budget Flexed Budget Actual Variances units units units 10,000 12,000 12,000 2,000F 10,000 9,000 9,000 1,000A 20,000 21,000 21,000 1,000 F $ $ $ $ 420,000 504,000 453,600 50,400A 518,000 466,200 428,400 37,800A 938,000 970,200 882,000 88,200A 189,000 195,300 154,350 40,950F 179,200 186,480 220,500 34,020A 77,000 79,800 75,705 4,095F 445,200 461,580 450,555 11,025F 154,000 159,600 184,800 25,200A Variable Overheads 61,600 63,840 75,600 11,760A Packages 31,500 32,550 37,800 5,250A Total Variable Costs 692.300 717,570 748,755 31,185A Contribution 245,700 252,630 133,245 119,385A Company Fixed Expenses 140,000 140,000 161,000 21,000A Operating Net Income 105,700 112,630 -27,755 140,385A Tom Kerridge is very concerned to see a loss of $27,755 compared to the expected net income of $105,700. Required (a) Explain the difference between the budget and the flexed budget and calculate the sales volume contribution variance and the sales mix variance. (4 marks) (b) Calculate the breakdown between price and efficiency variances for each of the cost variances shown in the variance column. (6 marks) (c) Calculate the material mix variance and explain what it means.
(a) Both budgets are built up using the standard cost information given in the question. The original budget column is based on the original sales forecast, whereas the flexed budget is calculated on the actual volume and mix of products sold. Sales volume and sales mix variances Sales Volume variances (contribution at std mix - budgeted contribution) $257,985 - $245,700 $12,285 F. Sales Contribution Mix variance Original Budget Sales volume 20,000 units $245,700 Budgeted contribution Flexed Budget Sales volume 21,000 units Contribution at standard mix of products $245,700 x 21/20 $257,985 $252,630 Standard contribution of actual mix of products Contribution Mix variance $5,355A Note: The question does not specifically state contribution mix so the sales mix variance was also accepted: Sales mix variance - (Actual sales at std mix x std price) (actual mix x std price): (938,000 x 21/20) = 984,900 - 970,200 = 14, 700 A. (b) Both the Flexed Budget and the Actual Results columns relate to the same sales volume and mix of products. Hence the sales figures shown in the variances column (-$50,400 and -$37,800) give the Sales Price Variances. On the expenditure side: Material W Usage variances: (12,000 x 2.0) + (9,000 x 2.5): = (46,500 lbs - 49,000 lbs) x $4.20 = $10,500 A. Price variance: 49,000 lbs x ($4.20 $3.15) = $51,450 F. Material X Usage variance: (12,000 × 1.5) + (9,000 × 1.7) = (33,300 lbs - 35,000 lbs) x $5.60 = $9,520 A. Price variance: 35,000 lbs x ($5.60 - $6.30) = $24,500 A. Material Y = (11,400 lbs 10,500 lbs) x $7.00 = Standard usage: (12,000 x 0.5) + (9,000 × 0.6) $6,300 F. Price variance: 10,500 lbs x ($7.21 $7.00) = $2,205 A. Direct Labour Usage variance: (62,000+ 0.5) x (9,000 x 0.6) = (11,400 hrs - 12,000 hrs) × $14.00 = $8,400 A. Rate variance: 12,000 hrs x ($15.40 $14.00) = $16,800 A. Variable Overheads Usage variance: (as Direct Labour) - 600 hrs @ $5.60 = $3,360 A. Rate variance: 12,000 hrs x ($6.30 $5.60) = $8,400 A. Packages 32,550 37.800 = $5250 A. Company Fixed Expenses 140,000 161,000 = 21,000 A. More detailed information on packages expenditure is needed for example, more precise usages and prices required. More detailed information on fixed costs could be analysed under specific headings - for example, Heating, Local Taxes, insurance etc. (c) We have: Material Mix Variance Standard Usage Actual Usage @ Std Mix lbs lbc $ $ Actual Usage lbs 46,500 48,183 x4.20 202,368.6 49,000 x4.2 33,300 34,505x 5.6 193,228.0 35,000 x5.6 Material W 205,800 X 196,000 Y 11,812 x7 82,684.0 10,500x7 73,500 11,400 91,200 94,500 478,280.6 94,500 475,300 Variance: 478,280.6475,300 = $2,980.6 F. If there had not been a positive mix of materials, the total material usage adverse variance would have been higher.