11 55

Managerial Accounting Chapter 11
CHAPTER 11: CASE STUDY 11-55

Comprehensive Variance Analysis
Used to Explain Operational Results
Rene Morel
Embry-Riddle Aeronautical University Online
MBAA 517
Instructor: Dr. Ana Machuca
Aunt Mollys Old Fashioned Cookies bakes cookies for retail stores. The companys 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
Mollys normal monthly production of 400,000 pounds, is as follows:
Cost Item
Quantity
Standard
Unit Cost
Direct Materials:
Cookie Mix
Milk Chocolate
Almonds
10 oz.
5 oz.
1 oz.
0.02 per oz.

0.15 per oz.
0.50 per oz.
$
$
$
$
0.20
0.75
0.50
1.45
Mixing
1 min
14.40 per hr.
0.24
Baking
2 min
18.00 per hr.
$
$
0.60
0.84
Variable Overhead
3 min
Total standard cost per pound
32.40 per hr.
$
$
1.62
3.91
Total Cost
Direct labor
Aunt Mollys management accountant, Karen Blair, prepares monthly budget reports based on
these standard costs. Aprils contribution report, which compares budgeted and actual
performance, is shown in the following schedule.
Contribution Report for April
Units (in pounds)

Revenue
Direct material
Direct labor
Variable overhead
Total variable costs
Contribution margin
Static
Budget
Actual
Variance
400,000
450,000
50,000
$ 3,200,000.00
$ 580,000.00
$ 336,000.00
$ 648,000.00
$ 1,564,000.00
$ 1,636,000.00
$ 3,555,000.00
$ 865,000.00
$ 348,000.00
$ 750,000.00
$ 1,963,000.00
$ 1,592,000.00
$
$
$
$
$
$
355,000.00
285,000.00
12,000.00
102,000.00
399,000.00
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 products 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
Direct Materials:
Cookie Mix
Milk Chocolate
Almonds
Direct Labor:
Mixing
Baking
Variable Overhead
Total Variable Costs
Quantity
4,650,000
2,660,000
480,000
450,000
800,000
Actual Cost
$
$
$
93,000.00
532,000.00
240,000.00
$ 108,000.00
$ 240,000.00
$ 750,000.00
$ 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
Actual
Actual
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
Direct Materials:
Cookie Mix
Milk Chocolate
Almonds
4,000,000
2,000,000
400,000
$0.02
$0.15
$0.50
$80,000.00
$300,000.00
$200,000.00
$580,000.00
4,650,000
2,660,000
480,000
$0.02
$0.20
$0.50
$93,000.00
$532,000.00
$240,000.00
$865,000.00
Direct labor
Mixing
Baking
400,000
800,000
$0.24
$0.30
$96,000.00
$240,000.00
$336,000.00
450,000
800,000
$0.24
$0.30
$108,000.00
$240,000.00
$348,000.00
Variable
Overhead
400,000
$1.62
$648,000.00
$648,000.00
$1,564,000.00
450000
$1.67
$750,000.00
$750,000.00
$1,963,000.00
Contribution
Margin
450,000
$1,636,000.00
$1,592,000.00

April Contribution Report
Quantity
Standard
Standard Cost
Actual
Actual
Cost
Actual Total
Cost
Revenue
450,000
$8.00
$3,600,000.00
450,000
$7.90
$3,555,000.00
Units (in pounds)
450,000
Direct Materials:
Cookie Mix
Milk Chocolate
Almonds
4,500,000
2,250,000
450,000
$0.02
$0.15
$0.50
$90,000.00
$337,500.00
$225,000.00
$652,500.00
4,650,000
2,660,000
480,000
$0.02
$0.20
$0.50
$93,000.00
$532,000.00
$240,000.00
$865,000.00
Direct labor
Mixing
Baking
450,000
900,000
$0.24
$0.30
$108,000.00
$270,000.00
$378,000.00
450,000
800,000
$0.24
$0.30
$108,000.00
$240,000.00
$348,000.00
Variable
Overhead
450,000
$1.62
$729,000.00
$729,000.00
$1,759,500.00
450000
$1.67
$750,000.00
$750,000.00
$1,963,000.00
Contribution Margin
450,000
$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)=$0.00
Milk Chocolate: Flexible=$0.15, Actual=$0.20, 2,660,000 x ($0.05) = $133,000 U
Almonds: Flexible=$0.50, Actual=$0.50, 480,000 x ($0.00)=$0.00
Total: $133,000.00 U
b. Direct-material quantity variance.
Direct Materials:
Cookie Mix
Milk Chocolate
Almonds
4,500,000
2,250,000
450,000
$0.02
$0.15
$0.50
$90,000.00
$337,500.00
$225,000.00
$652,500.00
4,650,000
2,660,000
480,000
$0.02
$0.20
$0.50
$93,000.00
$532,000.00
$240,000.00
$865,000.00
150,000 x ($0.02) = $3,000.00

410,000 x ($0.15) = $61,500.00
30,000 x ($0.50) = $15,000.00
Total 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
Baking
450,000
900,000
$0.24
$0.30
$108,000.00
$270,000.00
$378,000.00
$378,000-$348,000=$30,000.00 Favorable
450,000
800,000
$0.24
$0.30
$108,000.00
$240,000.00
$348,000.00
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
$3,600,000.00
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.

11 55

Uploaded by

Copyright:

Available Formats

11 55

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

11 55

Uploaded by

Copyright:

Available Formats

Managerial Accounting Chapter 11

CHAPTER 11: CASE STUDY 11-55

Managerial Accounting Chapter 11

0.02 per oz.

14.40 per hr.

18.00 per hr.

32.40 per hr.

Units (in pounds)

Managerial Accounting Chapter 11

Managerial Accounting Chapter 11

Units (in pounds)

Managerial Accounting Chapter 11

Units (in pounds)

Managerial Accounting Chapter 11

150,000 x ($0.02) = $3,000.00

Managerial Accounting Chapter 11

e. Variable-overhead spending variance.

You might also like