Question

Murphy Inc. manufactures a single product, DLZ. Murphy uses budgets and standards in its planning and control functions. Murphy makes use of its standards in order to derive their budgeted cost per unit. For example, Exhibit A provides information on the budgeted variable costs per unit. When determining direct material costs for the planning budget income statement, the $10 budgeted material cost per unit of DLZ would be used in the calculation.

Exhibit A

	Budgeted (Standard) Variable Costs Per Unit of DLZ
Raw material: 2 pounds at $5 per pound	$10
Direct labor: 0.5 direct labor hour at $12 per hour	6
Variable overhead: 0.5 direct labor hour at $8 per hour	4
Total variable budgeted (standard) cost per DLZ	$20

__________________________________________________________________

The standards for fixed manufacturing overhead costs are: 0.5 direct labor hour at $30 per hour. The standard fixed manufacturing overhead cost per hour is calculated based on a denominator level of activity of 50,000 direct labor hours.

The planning budget income statement is based on the expectation of selling 100,000 units of DLZ. The budgeted sales price is $60 per unit, and total budgeted fixed selling and administrative costs are $1,800,000. There are no variable selling and administrative costs in this firm.

The company actually produced and sold 120,000 units this year. The company never has a beginning or ending raw materials inventory, because it uses all raw materials purchased. Also, the company never has a beginning or ending finished goods inventory. Everything produced in the year is sold in that same year.

The actual income statement for the year is provided in Exhibit B.

Exhibit B                                                               

_______________________________________________________________

Actual Income Statement

Sales:
120,000 units produced and sold at $56	$6,720,000
Less Variable Costs:
Direct materials (250,000 pounds at $4.5 per pound)	1,125,000
Direct labor (57,000 direct labor hours at $11/hr.)	627,000
Variable manufacturing overhead	501,600
Contribution margin	4,466,400
Less Fixed Costs:
Fixed manufacturing overhead costs	1,600,000
Fixed selling and administrative costs	1,720,000
Net operating income	$   1,146,400

Required:

2.   Prepare a detailed income statement variance analysis using the contribution approach income statement (i.e., variable costing basis) for the year (i.e., compare the actual income statement with the flexible budget income statement and compare the flexible budget income statement with the planning budget income statement). Show all the revenue, spending, and activity variances appearing in the income statement analysis. A template for answering this question is given below. All variances should be marked with either an “F” for favorable or “U” for unfavorable. (35 points)

Murphy Variance Case Solution Template

	Actual		Revenue & Spending		Flexible	Activity		Planning
	Results		Variances		Budget	Variances		Budget
Sales	$$$		$$$		$$$	$$$		$$$
Less V.C.
DM	$$$		$$$		$$$	$$$		$$$
DL	$$$		$$$		$$$	$$$		$$$
V-OH	$$$		$$$		$$$	$$$		$$$
CM	$$$		$$$		$$$	$$$		$$$
Less FC
Manufacturing	$$$		$$$		$$$	$$$		$$$
Sell & Admin	$$$		$$$		$$$	$$$		$$$
NOI	$$$		$$$		$$$	$$$		$$$

3.   Prepare a very detailed manufacturing cost variance analysis (e.g., calculate the material price variance and quantity variance; the labor rate variance and efficiency variance; the variable overhead rate variance and efficiency variance; and the fixed manufacturing overhead budget variance and volume variance). All variances should be marked with either an “F” for favorable or “U” for unfavorable. Show your calculations. (40 points)

4.    Could you reconcile spending variances in Part 2 with manufacturing cost variances in Part 3? In other words, for each category of manufacturing costs, show the relationship between the variances in Part 2 with those in Part 3. Excluding your quantitative analysis if any, your explanation should not be more than 1/3 page double spaced with a 12 font size. (10 points)

Answer 1

2.

	Actual	Revenue & Spending Variances	Flexible Budget	Activity Variances	Planning Budget
						Activity -- units	120000		120000		100000
						Sales	6720000	-480000	7200000	1200000	6000000
Less Variable Costs:
Direct Material	1125000	75000	1200000	200000	1000000
Direct Labor	627000	93000	720000	120000	600000
Variable Overhead	501600	-21600	480000	80000	400000
Contribution margin	4466400	-333600	4800000	800000	4000000
Fixed Costs:
Manufacturing	1600000	200000	1800000	300000	1500000
Selling and Admn.	1720000	80000	1800000	0	1800000
Net Operating income	1146400	-53600	1200000	500000	700000

3. a. Material cost variances   

Material Quantity variance - (SQ - AQ) x SP	50000	Unfavourable
Material price variance   - (SP - AP) x AQ	125000	Favourable

Working:

Actual production	120000	units
Standard material per unit	2	pounds
Standard material for actual production (SQ)	240000	pounds
Actual quantity used (AQ)	250000	pounds
Standard price per pound (SP)	$5.00	per pound
Actual price per pound (AP)	$4.50	per pound

3.b. Labor cost variances:

Labor Efficiency Variance - (SH - AH) x SR	36000	Favourable
Labor rate variance   - (SR - AR) x AH	57000	Favourable

Working:

Standard hours per unit	0.5	hours
Standard hours for actual production (SH)	60000	hours
Actual hours worked (AH)	57000	hours
Standard labor rate per hour (SR)	$12.00	per hour
Actual labor rate per hour (AR)	$11.00	per hour

3.c. Variable overhead cost variances:

Variable overhead Efficiency Variance - (SH - AH) x SR	24000	Favourable
Variable overhead rate variance   - (SR - AR) x AH	45600	Unfavourable

Working:

Standard hours per unit	0.5	hours
Standard hours for actual production (SH)	60000	hours
Actual hours worked (AH)	57000	hours
Standard variable overhead rate per hour (SR)	$8.00	per hour
Actual variable overhead rate per hour (AR)	$8.80	per hour

4. Variance reconciliation:   

Material Quantity variance	50000	Unfavourable
Material price variance	125000	Favourable
Total Material Variance as per the income statement	75000	Favourable

Labor Efficiency Variance	36000	Favourable
Labor rate variance	57000	Favourable
Total labor variance asper income statement	93000	Favourable

Variable overhead Efficiency Variance	24000	Favourable
Variable overhead rate variance	45600	Unfavourable
Total variable overhead variance as per income statement	21600	Unfavourable