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Chapter 7 In Class Questions_solutions_only.pdf

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Department
Accounting
Course
ACCTG424
Professor
Trish Stringer
Semester
Fall

Description
In Class #7.1 Direct materials and manufacturing labour variances, solving unknowns All given items are designated by an asterisk. Flexible Budget Actual Costs (Budgeted Input Incurred Qty. Allowed for (Actual Input Qty. Actual Input Qty. Actual Output × Actual Price) × Budgeted Price × Budgeted Price) Direct Manufacturing (1,900 × $21) (1,900 × $20*) (4,000* × 0.5* × $20*) Labour $39,900 $38,000 $40,000 $1,900 U* $2,000 F* Price variance Efficiency variance Purchases Usage Direct (13,000 × $5.25) (13,000 × $5*) (12,500 × $5*) (4,000* × 3* × $5*) Materials $68,250* $65,000 $62,500 $60,000 $3,250 U* $2,500 U* Price variance Efficiency variance 2. Flexible budget – Efficiency variance = $40,000 – $2,000 = $38,000 Actual DMLH = $38,000 ÷ Budgeted price of $20/hour = 1,900 hours 3. $38,000 + Price variance, $1,900 = $39,900, the actual direct manuf. labour cost Actual rate = Actual cost ÷ Actual hours = $39,900 ÷ 1,900 hours = $21/hour 4. Standard qty. of direct materials = 4,000 units × 3 kg/unit = 12,000 kg 5. Flexible budget + Dir. matls. effcy. var. = $60,000 + $2,500 = $62,500 Actual quantity of dir. matls. used = $62,500 ÷ Budgeted price per kg = $62,500 ÷ $5/lb = 12,500 kg 6. Actual cost of direct materials, $68,250 – Price variance, $3,250 = $65,000 Actual qty. of direct materials purchased = $65,000 ÷ Budgeted price, $5/kg = 13,000 kg 7. Actual direct materials price = $68,250 ÷ 13,000 kg = $5.25 per kg In Class #7.2 Direct-materials variances, long-term agreement with supplier Required 1 Assume that Metalmoulder’s standard materials input per machining system is 198 kilograms of metal. Compute the direct materials price variance and direct materials efficiency variance for each month of the January to May 2013 period. Average Actual Total Actual Direct Total Actual Actual Direct Direct Materials Quantity of Number of Materials Input Materials Purchase Price Direct Machining in Kilograms Usage in per Kilogram Materials in Systems per Machining Month Dollars of Metal Kilograms Produced System (1) (2) (3) (4) = (2) ÷ ( 3) (5) (6) = (4) ÷ (5) January $290,880 $144 2,020 10 202 February 343,872 144 2,388 12 199 March 530,712 151.2 3,510 18 195 April 474,317 153.6 3,088 16 193 May 304,128 144 2,112 11 192 Materials Price Variance Actual Costs Incurred: Budgeted Price Direct Actual Input  per Unit of Actual Input  Materials Price Month Actual Price Actual Input Input Budgeted Price Variance (1) (2) (3) (4) (5) = (3)  (4) (6) = (2) – (5) January $290,880 2,020 $144 $290,880 $ 0 February 343,872 2,388 144 343,872 0 March 530,712 3,510 144 505,440 25,272 U April 474,317 3,088 144 444,672 29,645 U May 304,128 2,112 144 304,128 0 Materials Efficiency Variance Flexible Budget (Budgeted Input Actual Budgeted Budgeted Allowed for Direct Input  Input per Actual Price per Actual Output Materials Budgeted Unit of Output Unit of Achieved  Efficiency Month Price Output Achieved Input Budgeted Price) Variance (1) (2) (3) (4) (5) (6) = (3)  (4)  (7) = (2) – (5) (6) January $290,880 198 10 $144 $285,120 $ 5,760 U February 343,872 198 12 144 342,144 1,728 U March 505,440 198 18 144 513,216 7,776 F April 444,672 198 16 144 456,192 11,520 F May 304,128 198 11 144 313,632 9,504 F Required 2 How does the signing of a long-term agreement with a supplier – an agreement that includes a fixed-purchase-price clause-affect the interpretation of a materials price variance? The unfavourable materials price variances in March and April imply that Metalmoulder paid more than $144 per kilogram above the 2,400 kilogram contract amount. Contract Actual Price Amount for Cost for Quantity of per Kilogram Total Actual 2,400 kg: Purchases Purchases of Purchases Month Costs Incurred 2,400  $144 Above 2,400 kg Above 2,400 kg Above 2,400 kg (1) (2) (3) (4) = (2) – (3) (5) (6) = (4) ÷ (5) March $530,712 $345,600 $185,112 1,110 $166.77 April 474,317 345,600 128,717 688 187.09 The percentage price increases for the additional purchases above 2,400 kilograms are: Actual Price Standard Price % Increase March $166.77 $144 15.8 April 187.09 144 29.9 With a long-term agreement that has a fixed purchase-price clause for a set minimum quantity, no price variance will arise when the purchase amount is below the minimum quantity (assuming the budgeted price per unit is the contract price per unit). A price variance will occur only when the purchased amount exceeds the set minimum quantity. A price variance signals that the purchased amount exceeds this set minimum quantity (2,400 kilograms per month). It is likely that the supplier will charge a higher price (above $144) for purchases above the 2,400 base. If a lower price were charged, the purchaser might apply pressure to renegotiate the contract purchase price for the base amount. If the purchasing officer is able to negotiate only a small price increase for additional purchases above the base amount, the purchasing performance may well be “favourable” despite the materials price variance being labelled “unfavourable.” Metalmoulder may see the advantage of a long-term contract in factors other than purchase price (for example, a higher quality of materials, a lower required level of inventories because of more frequent deliveries, and a guaranteed availability of materials). In general, the existence of a long-term agreement reduces the importance of materials price variances when evaluating the month-to-month performance of a purchasing officer. In Class #7.3 Direct materials rate, efficiency, mix and yield variances Required 1 Calculate the total direct materials price and efficiency variances for November 2013. Solution Exhibit 7-3A presents the total rate variance ($3,100F), the total efficiency variance ($2,760U), and the total flexible-budget variance ($340F). Total direct materials rate variance can also be computed as: Direct materials Actual Budgeted  Actual price variance      Price Price  Inputs for each input Tolman = ($0.30 – $0.32)  62,000 = $1,240 F Golden Delicious = ($0.28 – $0.28)  155,000 = 0 Ribston = ($0.22 – $0.24)  93,000 = 1,860 F Total direct materials rate variance $3,100 F Total direct materials efficiency variance can also be computed as: Direct materials efficiency variance  Actual  Budgeted inputs allowed  Budgeted Inputs for actual outputs achieved  Prices for each input Tolman = (62,000 – 45,000)  $0.32 = 5,440 U Golden Delicious = (155,000 – 180,000)  $0.28 = 7,000 F Ribston = (93,000 – 75,000)  $0.24 = 4,320 U Total direct materials efficiency variance$2,760 U SOLUTION EXHIBIT 7-3A Columnar Presentation of Direct Materials Price and Efficiency Variances for Greenwood Inc. for November 2013 Flexible Budget: Actual Costs (Budgeted Inputs Incurred Allowed for Actual (Actual Inputs Actual Input Outputs Achieved  Actual Prices)  Budgeted Prices  Budgeted Prices) (1) (2) (3) Tolman 62,000  $0.30 = $18,600 62,000  $0.32 = $19,840 45,000  $0.32 = $14,400 Golden Delicious155,000  $0.28 = 43,400 155,000  $0.28 = 43,400 180,000  $0.28 = 50,400 Ribston 93,000  $0.22 = 20,460 93,000  $0.24 = 22,320 75,000  $0.24 = 18,000 $82,460 $85,560 $82,800 $3,100 F $2,760 U Total rate variance Total efficiency variance $340 F Total flexible-budget variance F = favourable effect on operating income; U = unfavourable effect on operating income Required 2 Calculate the total direct materials mix and yield variances for November 2013. Solution Exhibit 7-3B presents the total direct materials yield and mix variances for Greenwood Inc. for November 2013. The total direct materials yield variance can also be computed as the sum of the direct materials yield variances for each input: Direct  Budgeted total  Budgeted Budgeted  Actual total quantity of all  materials  quantity of all direct materials  direct price of yield variance      materials direct for each direct materials inputs allowed for  input mix materials  inputs used actual output  input  achieved  percentage inputs   Tolman = (310,000 – 300,000)  0.15  $0.32 = 10,000  0.15  $0.32 = $ 480 U Golden Delicious = (310,000 – 300,000)  0.60  $0.28 = 10,000  0.60  $0.28 = 1,680 U Ribston = (310,000 – 300,000)  0.25  $0.24 = 10,000  0.25  $0.24 = 600 U Total direct materials yield variance $2,760 U The total direct materials mix variance can also be computed as the sum of the direct materials mix variances for each input: Direct  Budgeted  Actual total Budgeted  Actual  materials  direct  quantity of price of  direct materials  mix variance  input mix  materials  all direct  direct for each  input mix  materials materials  percentage  input  percentage  inputs use d inputs Tolman = (0.20 – 0.15)  310,000  $0.32 = 0.05  310,000  $0.32 = $4,960 U Golden Delicious = (0.50 – 0.60)  310,000 x $0.28 = –0.10  310,000  $0.28 = 8,680 F Ribston = (0.30 – 0.25)  310,000  $0.24 = 0.05  310,000  $0.24 = 3,720 U Total direct materials mix variance = $ 0 U Required 3 Comment on your results in requirements 1 and 2. Greenwood paid less for Tolman and Ribston apples and, so, had a favourable direct materials rate variance of $3,100. It also had an unfavourable efficiency variance of $2,760. Greenwood would need to evaluate if these were unrelated events or if the lower price resulted from the purchase of apples of poorer quality that affected efficiency. The net effect in this case from a cost standpoint was favourable—the savin
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