MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 24

MANAGING PRODUCTIVITY AND

MARKETING EFFECTIVENESS

I. Questions
1. Productivity is the relationship between the output and the input
resources required for generating the output.
2. A critical success factor for a firm that competes as a cost leader is to be
the low cost provider. A low cost provider needs to perform the
required tasks for the same output with fewer resources than its
competitors.
3. Among criteria that often are used in assessing productivity and their
advantages and disadvantages are:
Using a prior year’s productivity as the criterion
Advantages:
 Data readily available
 Facilitates monitoring of continuous improvements
Disadvantages:
 Difficult to assess adequacy of productivity improvements
 Hard to compare productivity improvements between the years

Using the best performance as the criterion

Advantages:
 Provides as the benchmark the utmost performance
 Motivates people to strive for the maximum potential
Disadvantages:
 The standard can be too high for the operation and frustrating to
workers
 Data may be difficult to obtain
 The criteria on which the operation is based may not be comparable

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4. An operational productivity is the ratio of the output to the number of

units of an input resource.
A financial productivity measures the relationship between the output
and the cost of one or more of the input resources.
5. A partial productivity is a productivity measure that focuses only on the
relationship between the amount of one of the input resources and the
output attained.
A total productivity measures the relationship between the output and
the total input costs of all the required input resources for the output.
6. Manufacturing personnel often prefer operational productivity measures
over financial productivity measures because all the input data for
computing operational productivity measures are either results of their
activities or resources consumed for these activities. Financial
productivity measures use costs of resources that often are results of
activities by personnel outside of manufacturing functions.
7. Measurements of marketing effectiveness include market share, sales
price, sales mix, and sales quantity variances.
8. Sales quantity variance is a component of sales volume variance. A
sales volume variance can be the result of both sales mix and sales
quantity variances.
9. A market size variance measures the effect on the contribution margin
and operating income of a firm because of changes in the total market
size for all firms in the same industry or product segment. A market
share variance examines the effect on the contribution margin and
operating income of a firm because of deviations of the firm’s actual
market shares from its budgeted market shares.
10. a. No. A multi-product firm can still have an unfavorable sales volume
variance even if it sells more than the budgeted units of sales. The
unfavorable sales volume variance is a result of selling more of less
profitable products and less of more profitable products.
b. A favorable sales quantity variance reflects the marketing manager’s
excellent performances only if there is no adverse change in selling
prices, sales mix, or market size. A favorable sales quantity variance
is hardly favorable to the firm if the firm has lowered its selling
prices or sold more of low-priced, low-margin and less of high-
priced, high-margin products. Increases in the total market size in
which the firm operates often also leads to a favorable sales quantity

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variance. A favorable sales quantity variance in an expanding total

market may not be favorable to the firm strategically if the firm also
has an unfavorable market share variance.
A firm can have a favorable market size variance and an unfavorable
market share variance if the proportional increase of the firm’s total
sales is less than those of the total market.
c. Yes. The Wall Street Journal reported on April 14, 1994 (p. B4) that
Colgate-Palmolive had slashed marketing spending to reach its
ambitious target of 15 percent annual earnings growth. The firm, for
example, spent P88.8 million on advertising in 1993, compared with
P97.5 million in 1992. The firm met the goal of a 15 percent
increase in per share earnings and its CEO, Mr. Mark, expected the
company to announce a similar increase for first quarter earnings
soon. The market share of the firm, however, have decreased in all
categories.
11. The sales volume variance is the sum of sales quantity and sales mix
variances. The sales quantity variance is the sum of market size and
market share variances.

II. Problems

Problem 1 (Operational and Financial Partial Productivity)

Requirement 1

Star Company
Comparative Income Statement
For the years 2005 and 2006

2005 2006
Sales 15,000 x P40 = P600,000 18,000 x P40 = P720,000
Variable cost of sales:
Materials 12,000 x P 8 = P 96,000 12,600 x P10 = P126,000
Labor 6,000 x P20 = 120,000 5,000 x P25 = 125,000
Power 1,000 x P 2 = 2,000 2,000 x P 2 = 4,000
Total variable costs of sales P218,000 P255,000
Contribution margin P382,000 P465,000

Change in profits from 2005: P465,000 – P382,000 = P83,000 increase

Requirement 2

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Operational Partial Productivity

2006 2005
DM 18,000 / 12,600 = 1.4286 15,000 / 12,000 = 1.25
DL 18,000 / 5,000 = 3.6 15,000 / 6,000 = 2.5
Power 18,000 / 2,000 = 9 15,000 / 1,000 = 15

Requirement 3

Total cost of production factors

2006 2005
DM 12,600 x P10 = P126,000 12,000 x P 8 = P 96,000
DL 5,000 x P25 = P125,000 6,000 x P20 = P120,000
Power 2,000 x P 2 = P 4,000 1,000 x P 2 = P 2,000

Financial Partial Productivity

2006 2005
DM 18,000 / 126,000 = 0.1429 15,000 / 96,000 = 0.15625
DL 18,000 / 125,000 = 0.144 15,000 / 120,000 = 0.125
Power 18,000 / 4,000 = 4.5 15,000 / 2,000 = 7.5

Requirement 4

Both direct materials and direct labor operation partial productivity improved
from 2005 to 2006. In 2006 the firm was able to manufacture more output
units for each unit of materials placed into production and for each hour
spent on production. The operational productivity of power in 2006
deteriorated from 2005. It is likely that the firm used more equipment in
production in 2006 that reduced consumption of materials and production
hours.

The financial partial productivity for both direct materials and power
deteriorated from 2005 to 2006. Increases in direct materials costs were
more than the improvements in operational partial productivity for direct
materials. Like the operational partial productivity, the financial partial
productivity for direct labor also improved. The extent of improvements,
however, is much lower in financial partial productivity. The direct labor
operational partial productivity improved 44 percent in 2006 over those of

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2005. The financial partial productivity, however, improved only 15.2

percent between the two years. The decrease in financial partial productivity
is likely a result of increases in direct labor wages.

Requirement 5

Operating Data for Decomposing Financial Productivity Measure

2006 Output, 2006 Output 2006 Output 2005 Output

1/2006 1/2005 1/2005 1/2005
Productivity Productivity Productivity Productivity
2006 Input cost 2006 Input cost 2005 Input cost 2005 Input cost

(1) Output (unit):

18,000 18,000 18,000 15,000

(2) 1/Productivity
DM: 12,600/18,000 12,000/15,000 12,000/15,000 12,000/15,000
= 0.7 = 0.8 = 0.8 = 0.8
DL: 5,000/18,000 6,000/15,000 6,000/15,000 6,000/15,000
= 0.2778 = 0.4 = 0.4 = 0.4
Power: 2,000/18,000 1,000/15,000 1,000/15,000 1,000/15,000
= 0.1111 = 0.0667 = 0.0667 = 0.0667

(3) Cost per unit of input

DM: P10 P10 P 8 P 8
DL: P25 P25 P20 P20
Power: P 2 P 2 P 2 P 2

(4) Output x (1/Productivity) x Input cost

DM: 18,000 x 0.7 x 10 18,000 x 0.8 x 10 18,000 x 0.8 x 8 15,000 x 0.8 x 8
= P126,000 = P144,000 = P115,200 = P96,000
DL: 18,000 x 0.2778 x 25 18,000 x 0.4 x 25 18,000 x 0.4 x 20 15,000 x 0.4 x 20
= P125,010 = P180,000 = P144,000 = P120,000
Power: 18,000 x 0.1111 x 2 18,000 x 0.0667 x 2 18,000 x 0.0667 x 2 15,000 x 0.0667 x 2
= P4,000 = P2,401 = P2,401 = P2,001
Total P255,010 P326,401 P261,601 P218,001

Decomposition
DM: 18,000 / 18,000 / 144,000 18,000 / 115,200 15,000 / 96,000
126,000 = 0.125 = 0.15625 = 0.15625

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= 0.1429
DL: 18,000 / 125,010 18,000 / 180,000 18,000 / 144,000 15,000 / 120,000
= 0.1440 = 0.1 = 0.125 = 0.125
Power: 18,000 / 18,000 / 2,401 18,000 / 2,401 15,000 / 2,001
4,000 = 7.4969 = 7.4969 = 7.4963
= 4.5

Productivity change Input price change Output change

DM: 0.1429 – 0.125 0.125 – 0.15625 0.15625 – 0.15625

= 0.0179 F = 0.03125 U =0
DL: 0.144 – 0.1 0.1 – 0.125 0.125 – 0.125
= 0.044 F = 0.025 U =0
Power: 4.5 – 7.4969 7.4969 – 7.4969 7.4969 – 7.4963
= 2.9969 U =0 = 0.0006 (rounding)

Summary of Result
Change as % of 2005 Productivity
Productivity Input Price Total Productivity Input Price Total
Change Change Change Change Change Change
DM: 0.0179 F 0.03125 U 0.01335 U 11.46% F 20% U 8.54% U
DL: 0.044 F 0.025 U 0.019 F 35.2% F 20% U 15.2% F
Power: 2.9969 U 0 2.9969 U 39.98% U 0 39.98% U

Requirement 6

Productivity for both direct materials and direct labor improved in 2006.
The percentages of improvements in productivity are 11.46 and 35.2 for
direct materials and direct labor, respectively, of the 2005 productivity.
However, cost increases in direct materials and direct labor reduced the gains
in productivity on these two manufacturing factors.

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Problem 2 (Direct Labor Rate and Efficiency Variances, Productivity

Measures, and Standard Costs)

Requirement 1

Assembly Department Direct Labor Variances

2005:
Total actual direct labor hours: 25 x 20,000 = 500,000
Total standard direct labor hours: 24 x 20,000 = 480,000

P30 x 500,000 P28 x 500,000 P28 x 480,000

= P15,000,000 = P14,000,000 = P13,440,000

Rate variance Efficiency variance

= P1,000,000 U = P560,000 U

2006:
Total actual direct labor hours: 20 x 20,000 = 400,000
Total standard direct labor hours: 21 x 20,000 = 420,000

P36 x 400,000 P35 x 400,000 P35 x 420,000

= P14,400,000 = P14,000,000 = P14,700,000

Rate variance Efficiency variance

= P400,000 U = P700,000 F

Testing Department Direct Labor Variances

2005:
Total actual direct labor hours: 12 x 20,000 = 240,000
Total standard direct labor hours: 14 x 20,000 = 280,000

P20 x 240,000 P21 x 240,000 P21 x 280,000

= P4,800,000 = P5,040,000 = P5,880,000

Rate variance Efficiency variance

= P240,000 F = P840,000 F
2006:

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Total actual direct labor hours: 10 x 20,000 = 200,000

Total standard direct labor hours: 11 x 20,000 = 220,000

P24 x 200,000 P25 x 200,000 P25 x 220,000

= P4,800,000 = P5,000,000 = P5,500,000

Rate variance Efficiency variance

= P200,000 F = P500,000 F

Recap:
Assembly Department Testing Department
2005 2006 2005 2006
Rate variance P1,000,000 U P400,000 U P240,000 F P200,000 F
Efficiency variance P560,000 U P700,000 F P840,000 F P500,000 F

Requirement 2

Assembly Department Operational Partial Productivity

2005: 20,000 / 500,000 = 0.04

2006: 20,000 / 400,000 = 0.05

Testing Department Operational Partial Productivity

2005: 20,000 / 240,000 = 0.0833

2006: 20,000 / 200,000 = 0.1

Requirement 3

Assembly Department Financial Partial Productivity

2005: 20,000 / P15,000,000 = 0.001333

2006: 20,000 / P14,400,000 = 0.001389

Testing Department Financial Partial Productivity

2005: 20,000 / P4,800,000 = 0.004167

2006: 20,000 / P4,800,000 = 0.004167
Requirement 4

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Operational partial productivity

2005 2006 Change
Assembly 0.04 0.05 0.01 F 25% F
Testing 0.0833 0.1 0.0167 F 20% F

Financial partial productivity

2005 2006 Change
Assembly 0.001333 0.001389 0.000056 F 4.2% F
Testing 0.004167 0.004167 -0- -0-

Operational partial productivity improved in both departments from 2005 to

2006. The financial partial productivity in the Assembly also improved
while the Testing remains unchanged.

Requirement 5

The standards in a standard costing system often are determined

independently and incorporate changes in operating factors. The standard for
the operation of a year may change because of changes in, for example,
technology, quality of materials, experience of production workers, designs,
or processes.

Productivity measures use as the criterion the productivity of a prior year

without adjusting for changes occurred or the expected changes for the
current year. As a result, assessments of productivity may depict an entirely
different picture than those of variance analyses in a standard costing system.

Problem 3 (Sales Variance)

Requirement 1

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Selling price variances (in 000)

Flexible budget sales:
Master Budget for 2005 Budgeted Total Units Flexible
Total Selling Price Sold in Budget
Sales Units Per Unit 2005 Sales
Premium P36,000  240 = P150 x 180 = P27,000
Regular P43,200  360 = P120 x 540 = P64,800
Premium Regular
Selling Selling
Flexible Price Flexible Price
Actual Budget Variance Actual Budget Variance
Barrels 180 180 540 540
Sales P28,800 P27,000 P1,800 F P62,100 P64,800 P2,700 U

Total selling price variance of the firm = P1,800 F + P2,700 U = P900 U

Requirement 2

Sales volume variances for the period for each of the products and for the
firm

Flexible budget variable expenses:

Master Budget for 2005 Budgeted Total Flexible
Total Variable Units Budget
Variable Number of Expenses Sold in Variable
Expenses Units Per Unit 2005 Expenses
Premium P21,600  240 = P90 x 180 = P16,200
Regular P27,000  360 = P75 x 540 = P40,500

Premium Regular
Sales Sales
Flexible Master Volume Flexible Master Volume
Budget Budget Variance Budget Budget Variance
Barrels 180 180 540 360
Sales P27,000 P36,000 P64,800 P43,200
Variable
expenses 16,200 21,600 40,500 27,000
Contribution
margin P10,800 P14,400 P3,600 U P24,300 P16,200 P8,100 F

Fixed
expenses 10,000 10,000 – 5,000 5,000 –
Operating
income P 800 P 4,400 P3,600 U P19,300 P11,200 P8,100 F

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Total sales volume variance of the firm = P3,600 U + P8,100 F = P4,500 F

Requirement 3
Sales quantity variances for the firm and for each of the products. (See next
page.)

Requirement 4
Sales mix variances for the period for each of the products and for the firm
(000 omitted).
Calculation for sales mixes:
Budgeted Actual
Total Sales Sales Total Sales Sales
in Units Mix in Units Mix
Premium 240 0.40 180 0.25
Regular 360 0.60 540 0.75
600 1.00 720 1.00

Flexible Budget Master Budget

Total actual units of all Total actual units of Total budgeted units of
products sold x Actual all products sold x sales for all products x
sales mix x Standard Budgeted sales mix x Budgeted sales mix x
contribution margin per Standard contribution Standard contribution
unit margin per unit margin per unit

Premium
720 x 0.25 x P60 = P10,800 720 x 0.40 x P60 = P17,280 600 x 0.40 x P60 = P14,400

Sales mix variance Sales quantity variance

= P6,480 U = P2,880 F

Sales volume variance

= P10,800 – P14,400
= P3,600 U

To verify: Sales volume variance

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= Sales mix variance + Sales quantity variance

= P6,480 U + P2,880 F
= P3,600 U
Regular
720 x 0.75 x P45 = P24,300 720 x 0.60 x P45 = P19,440 600 x 0.60 x P45 = P16,200

Sales mix variance Sales quantity variance

= P4,860 F = P3,240 F

Sales volume variance

= P24,300 – P16,200
= P8,100 F

To verify: Sales volume variance

= Sales mix variance + Sales quantity variance
= P4,860 F + P3,240 F
= P8,100 F

Total
Sales mix variance = P6,480 U + P4,860 F = P1,620 U
Sales quantity variance = P2,880 U + P3,240 F = P6,120 F

Requirement 5

Verification

Sales mix variance + Sales quantity variance = Sales volume variance

Premium P6,480 U P2,880 F P3,600 U
Regular P4,860 F P3,240 F P8,100 F
Total P1,620 U P6,120 F P4,500 F

Requirement 6

Market size variances. (See below.)

Requirement 7

Market share variances (000 omitted. See below.)

Weighted average budgeted contribution margin per unit

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Master budget total contribution margin P30,600

Master budget total sales units  600
Weighted-average budgeted contribution margin per unit P 51
Calculation for market shares:
Budgeted: Total sales in units 600  Total sales of the industry 1,500 = 0.40
Actual: Total sales in units 720  Total sales of the industry 1,600 = 0.45

Calculation for variances:

Actual total market Actual total market x Budgeted total market
size x Actual market Budgeted market size x Budgeted market
share x Average share x Average share x Average
budgeted contribution budgeted contribution budgeted contribution
margin per unit margin per unit margin per unit
1,600 x 0.45 x P51 1,600 x 0.40 x P51 1,500 x 0.40 x P51
= P36,720 = P32,640 = P30,600

Market share variance Market size variance

= P4,080 F = P2,040 F

Sales quantity variance

= P4,080 F + P2,040 F
= P6,120 F

Requirement 8

The sum of market size variance and market share variance and verification
that this total equals the sales quantity variance.

Total market size variance + Total market share variance = Total quantity variance
P2,040 F P4,080 F P6,120 F

Problem 4 (Productivity and Ethics)

Requirement 1

The operational partial productivity deteriorates slightly from 0.0051 in 2005

(500/99,000) to 0.005 in 2006 (560/112,000). Manipulating accounting
numbers in order to show a desirable result is an unethical behavior
regardless the intention.

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Requirement 2

Tan should not follow the order without following a consistent accounting
method. If the firm believes that certain cost items should be reclassified as
indirect costs, the same procedure should be followed for all years. Tan
should then go back and revise operating results of previous years.

Problem 5 (Small Business Market Size and Share Variances)

Requirement 1

Budget Actual
Empress Empress
’ ’
Designs Industry Share Designs Industry Share
WS 50 500 10.0% 45 425 45/425
DH 25 200 12.5% 35 150 35/150

Requirement 2

Weighted Average Budgeted Contribution Margin Per Unit:

(50 welcome signs x P2) + (25 doghouses x P5.20) / 75 = P3.07

Market Share Variance

Welcome Signs: (45/425 – 0.1) x 425 x P3.07 = P7.68 F
Doghouses: (35/150 – 25/200) x 150 x P3.07 = P49.89 F

Requirement 3

Market Size Variance

Welcome Signs: (45 – 500) x 50/500 x P3.07 = P23.03 U
Doghouses: (150 – 200) x 25/200 x P3.07 = P19.19 U

Requirement 4

Among possible reasons are quality changes, pricing changes, less producers
due to seasonal variations, and market no longer there.

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Requirement 5

Among alternatives are improving costs through adopting activity based

costing, making different signs, using less expensive wood, finding
competitive advantage.

III. Multiple Choice Questions

1. A 11. A 21. A
2. C 12. B 22. D
3. B 13. A 23. C
4. D 14. B 24. D
5. A 15. C
6. C 16. D
7. C 17. B
8. B 18. C
9. C 19. A
10. D 20. D

Supporting Computations:

Operational partial productivity

2005 2006
Input Input
Resource Partial Resource Partial
Output Used Productivity Output Used Productivity
X-45 60,000  75,000 = 0.8 64,000  89,600 = 0.7143

Direct (1)
labor 60,000  10,000 = 6.0 64,000  10,847 = 5.9002

(2)
Financial partial productivity

2005 2006
Cost of Cost of
Input Input
Units of Resource Partial Units of Resource Partial
Output Used Productivity Output Used Productivity

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X-45 60,000  P540,000 = 0.1111 64,000  P609,280 = 0.1050

Direct (3)
labor 60,000  300,000 = 0.2 64,000  P347,104 = 0.1844
Total productivity in units
(4)
2005 2006
(a) Total units manufactured 60,000 64,000
(b) Total variable manufacturing costs
incurred P840,000 P956,384
(c) Total productivity (a)  (b) 0.071429 (5) 0.066919
(d) Decrease in productivity 0.071429 – 0.066919 = 0.00451 (6)

Total productivity in sales pesos

2005 2006
(a) Total sales P1,500,000 P1,600,000
(b) Total variable manufacturing costs
incurred P840,000 P956,384
(c) Total productivity (a)  (b) P1.7857 (5) P1.6730
(d) Decrease in productivity P1.7857 – P1.6730 = P0.1127 (6)

(7) Operational partial productivity:

Actual Production 9,500
Operational Partial Productivity = Actual Input = 8,950 = 1.06

(8) Financial partial productivity:

2005 2006
(1) Output 400,000 486,000
(2) Direct materials:
Quantity 160 180
Unit cost x P3,375 x P3,125
Total direct materials cost P540,000 P562,500
(3) DM financial partial
productivity (1) (2) 0.7407 0.864
(4) Direct labor:
Hour spent 10,000 13,500
Hourly wage x P26 x P25
Total direct labor cost P260,000 P337,500
(5) DL financial partial
productivity (1) (4) 1.5385 1.44

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(9) Total productivity:

2005 2006
(1) Output 400,000 486,000
Total cost:
Direct materials cost P540,000 P562,500
Direct labor cost 260,000 337,500
(2) Total cost P800,000 P900,000
(3) Total productivity (1) (2) 0.5 0.54

Market Share

Firm Total Market Market Share

Actual 100,000 / 2,000,000 = 5%
Budget 90,000 / 1,500,000 = 6%

1. Market size variance: (2,000,000 – 1,500,000) x 0.06 x P8 = P240,000 F (10)

2. Market share variance: (5% - 6%) x 2,000,000 x P8 = P160,000 U (11)
3. Sales quantity variance:(100,000 – 90,000) x P8 = P 80,000 F (12)

(13)
Product A Product B Total
Budgeted sales unit 30,000 60,000 90,000
Budgeted contribution margin per
unit x P4.00 x P10.00
Budgeted total contribution margin P120,000 P600,000 P720,000
Budgeted average contribution
margin per unit P8.00

(14)
Product A Product B Total
Actual units sold 35,000 65,000
Budgets sales unit – 30,000 – 60,000
Differences in sales units 5,000 5,000
Budgeted contribution margin per
unit x P4.00 x P10.00
Sales volume contribution margin
variance P20,000 F P50,000 F P70,000 F

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Sales mixes:
Budgeted Actual
Unit % Unit %
Product A 30,000 1/3 35,000 35
Product B 60,000 2/3 65,000 65
TOTAL 90,000 100 100,000 100

(15)Sales mix contribution margin variance:

Product A: (0.35 – 1/3) x 100,000 x P4 = P 6,667 F
Product B: (0.65 – 2/3) x 100,000 x P10 = 16,667 U
Total sales mix contribution margin variance P10,000 U

(16)Sales quantity contribution margin variance:

Product A: (100,000 – 90,000) x 1/3 x P4 = P13,333 F
Product B: (100,000 – 90,000) x 2/3 x P10 = 66,667 F
Total sales quantity contribution margin variance P80,000 F

(17)Weighted average budget contribution margin per unit:

P8.00 (calculated in no. 13)
Market size contribution margin variance:
(2,000,000 – 1,500,000) x 90,000 / 1,500,000 x P8 = P240,000 F

(18)Market share contribution margin variance:

(100,000 / 2,000,000 – 90,000 / 1,500,000) x 2,000,000 x P8 =
P160,000 U

(19)Flexible budget contribution margin variance:

Flexible
Budget
Total Contribution margin Contribution
Actual Operating Result Flexible Budget Margin Variance
Product A 35,000 x P3 = P105,000 35,000 x P4 = P140,000 P 35,000 U
Product B 65,000 x P12 = P780,000 65,000 x P10 = P650,000 P130,000 F
TOTAL P885,000 P790,000 P 95,000 F

(20)Total contribution margin price variance (given) P50,000 F

Sales price variance:
Product A: (P12 – P10) x 35,000 = P70,000 F

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Product B: (P24 – P25) x 65,000 = P65,000 U

Total sales price variance – 5,000 F
Total variable cost price variance P45,000 F

(21)Total flexible budget contribution margin variance P95,000 F

Total contribution margin price variance (given) 50,000 F
Total variance cost efficiency variance P45,000 F

(22)Sales mix ratio:

Actual Budget
Quantity Ratio Quantity Ratio
R66 1,000 0.50 1,200 0.75
R100 1,000 0.50 400 0.25
TOTAL 2,000 1.00 1,600 1.00

R66 sales quantity variance: (2,000 – 1,600) x 0.75 x P10 = P3,000 F

(23)R100 sales mix variance: (0.5 – 0.25) x 2,000 x P70 = P35,000 F

(24)Total sales volume variance:

R66: (1,000 – 1,200) x P10 = P 2,000 U

R100: (1,000 – 400) x P70 = 42,000 F
Total P40,000 F

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