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ACTIVITY 4
MA610 Managerial Accounting
Lesson 4: Budgets and Variance Analysis
Activity 4: Budgeting (100 Points)
Part A (50 points)
Complete Problem 8-44 (p. 341) on the Lucerne Chocolate Company. (A 1½-page response is required.)
Flexible Budget:
Standard Input Quantities
Cost Incurred: Allowed for Outputs
Actual Inputs × Actual Input Quantities Achieved ×
Actual Prices × Standard Prices Standard Prices
Direct Materials:
3,400 lbs. × 17.3CHF 3,400 lbs × 18CHF 2,900 lbs. × 18CHF
=58,820CHF = 61,200CHF = 52,200CHF
3,400 × .7CHF= Price variance, 500 × 18CHF = Quantity variance,
2,380CHF F 9,000CHF U
Flexible-budget variance, 6,620 CHF U
ex
Direct Labor:
3,925 hrs. × 38.6CHF 3,925 hrs. × 38CHF 3,625 hrs. × 38CHF
= 151,505CHF = 149,150CHF = 137,750CHF
3,925 × .6CHF 300 × 38CHF
= Price variance, Quantity variance,
2,355CHF U 11,400CHF U
Flexible-budget variance, 13,755 CHF U
Manufacturing Overhead:
Predicted Flexible Budget:
Overhead Based Standard Driver Use
on Actual Allowed for Outputs
Actual Overhead Driver Use Achieved ×
Costs Incurred × Standard Prices Standard Prices
3,925 hrs. × 11CHF 3,625 hrs. × 11CHF
46,675CHF = 43,175CHF = 39,875CHF
Spending variance, 46,675 – 43,175 = 3,500CHF U 300 × 11CHF
= Efficiency variance,
3,300CHF U
Flexible-budget variance, 6,800CHF U
The flexible-budget allowance for any variable cost is the same as (is equal to) the total standard quantity allowed for the good units produced times the standard price.
The budget allowance under standard costing for variable costs always depends on output, the units produced. Therefore, the direct labor budget for 2,900 units is, as shown above, 2,900 units × 1.25 hours × 38CHF = 137,750CHF. For 3,900 units, the budgetary allowance would be 3,900 units × 1.25 hours × 38CHF = 185,250CHF. Note again that a budget can be established after the fact — after the number of units produced is known.
8-44 Variance Analysis
The Lucerne Chocolate Company uses standard costs and a flexible budget to control its manufacture of fine chocolates. The purchasing agent is responsible for material price variances, and the production man-ager is responsible for all other variances. Operating data for the past week are summarized as follows:
1. Finished units produced: 2,900 boxes of chocolates.
2. Direct materials: Purchased and used, 3,400 pounds of chocolate at 17.3 Swiss francs (CHF) per pound; standard price is CHF 18 per pound. Standard allowed per box produced is 1 pound.
3. Direct labor: Actual costs, 3,925 hours at CHF 38.6, or CHF 151,505. Standard allowed per box produced is 1.25 hours. Standard price per direct-labor hour is CHF 38.
4. Variable manufacturing overhead: Actual costs, CHF 46,675. Budget formula is CHF 11 per standard direct-labor hour.
Compute the following:
1. a. Materials purchase-price variance
b. Materials quantity variance
c. Direct-labor price variance
d. Direct-labor quantity variance
e. Variable manufacturing-overhead spending variance
f. Variable manufacturing-overhead efficiency variance (Hint: For format, see the solution to the Summary Problem for Your Review , page 330.)
2.a. What is the budget allowance for direct labor?
b. Would it be any different if production were 3,900 boxes?
Part B (50 points)
Case 8-54 (pp. 346-347) is an application to assess your ability to work with flexible budgets. This case provides budgetary information about Hopkins Community Hospital, an outpatient clinic. This is a good example of the use of a flexible budget for analyzing performance at a service sector organization. Use the information in the narrative and the supporting schedules to answer the “Required” questions. (A 1½-page response is required.)
8-54 Analyzing Performance
Hopkins Community Hospital operates an outpatient clinic in a town several miles from the main hospital. For several years the clinic has struggled just to break even. The clinic’s financial budget for 20X7 is shown below:
20X7 Budget
Total Per Patient
Revenues (4,000 patients at $180 each) $72,000 $180
Cost of services
Physicians $240,000
Nurses and technicians 180,000
Supplies 60,000
Overhead 252,000 732,000 183
Net loss
$ (12,000) $ (3)
On the average, billings for each patient-visit are expected to be $180. Costs in 20X7 are expected to average $183 per patient-visit, as follows:
The clinic is generally staffed by one physician who must be present whether or not there is a patient to see. Currently, about 10% of the physician’s time is idle. The clinic employs nurses and techni-cians to meet the actual workload necessitated by patient appointments. Their cost averages $30 per hour, and usage varies proportionately with the number of patient-visits. Supplies cost is also variable with respect to patient-visits. Fixed overhead in 20X7 was expected to be $180,000; the remaining $72,000 of overhead varies with respect to patient visits. Included in the fixed overhead was $30,000 of hospital-wide administrative costs that the hospital allocates to the clinic and $37,500 of deprecia-tion on the clinic’s property and equipment.
Cindy Ryden, controller of Hopkins Community Hospital, reported the actual loss of $20,200
in 20X7 shown next. This represented the fifth straight year of losses. She does not feel it is right for patients in the main hospital to subsidize those using the clinic. Therefore, she suggested that unless the situation could be changed, the clinic should be closed. Brett Johnson, administrative vice president of the hospital, charged with oversight of the clinic, disagreed: “We provide a valu-able service to the community with the clinic. Even if we are losing money, it is worthwhile to keep it open.”
At the end of 20X7, the clinic’s actual results for the year were as follows:
Total
Revenues (3,800 patients at $180 each) $684,000
Cost of services
Physicians $231,000
Nurses and technicians (5,800 hours) 182,700
Supplies 58,500
Overhead 232,000 704,200
Net loss $ (20,200)
1. Would Hopkins Community Hospital have saved money in 20X7 if the outpatient clinic was closed? Explain.
2. Explain the difference between the budgeted loss of $12,000 and the actual loss of $20,200 (that is, the static-budget variance of $8,200) in as much detail as possible. From the analysis of the 20X7 results, what actions would you suggest to avoid a loss in 20X8?