Reference no: EM13356312
Analysis of unfavorable income variance.
The Markley Division of Rosette Industries manufactures and sells patio chairs. The chairs are manufactured in two versions: a metal model and a plastic model of a lesser quality. The company uses its own sales force to sell the chairs to retail stores and to catalog outlets. Generally, customers purchase both the metal and plastic versions.
The chairs are manufactured on two different assembly lines located in ad-joining buildings. The division management and sales department occupy the third building on the property. The division management includes a division controller responsible for the divisional financial activities and the preparation of reports explaining the differences between actual and budgeted performance. The controller structures these reports such that the sales activities are distinguished from cost factors so that each can be analyzed separately.
The operating results for the first three months of the fiscal year as compared to the budget are presented in Table I. The budget for the current year was based upon the assumption that Markley Division would maintain its present market share of the estimated total patio chair market (plastic and metal combined). A status report had been sent to corporate management toward the end of the second month indicating that divisional operating income for the first quarter would probably be about 45 percent below budget; this estimate was just about on target. The division's operating income was below budget even though industry volume for patio chairs increased by 10 percent more than was expected at the lime the budget was developed.
During the quarter, the Markley Division manufactured 55.000 plastic chairs and 22.500 metal chairs. The costs incurred by each assembly line is also presented as Table 2.
The standard variable manufacturing costs per unit and the budgeted monthly fixed manufacturing costs established for the current year are presented below.
TABLE 1 Markley Division Operating Results for the First Quarter
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Favorable
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(unfavorable)
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relative to the
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Actual
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Budget
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budget
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Sale in units
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Plastic model
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60,000
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50,000
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10,000
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Metal model
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20,000
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25,000
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(5,000)
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Sales revenue
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Plastic model
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5630,000
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$500,000
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$130,000
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Metal model
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300,000
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375,000
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(75,000)
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Total sales
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5930,000
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$875,000
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$ 55,000
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Less variable costs
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Manufacturing (at standard)
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Plastic model
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§480,000
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$400,000
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$(80,000)
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Metal model
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-200,000
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250,000
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50,000
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Selling
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Commissions
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46,500
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43,750
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(2,750)
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Bad debt allowance
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9,300
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8,750
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(550)
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Total variable costs (except variable
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manufacturing variances)
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$735,800
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5702,500
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$(33,300)
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Contribution margin (except variable
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manufacturing variances)
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$194,200
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$172,500
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$ 21,700
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Less other costs
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Variable manufacturing costs variances from
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standards
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$ 49,600
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s _
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$(49,600)
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Fixed manufacturing costs
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49,200
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48,000
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(1,200)
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Fixed selling & admin, costs
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38,500
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36,000
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(2,500)
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Corporation offices allocation
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18,500
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17,500
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(1,000)
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Total other costs
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$155,800
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$101,500
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$(54,300)
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Divisional operational income
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$ 38,400
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$ 71,000
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, $(32,600)
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TABLE 2. Actual Manufacturing Costs
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Raw Materials
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(stated in
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equivalent finished
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chairs)
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Quantity
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Price
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Plastic Model
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Metal Model
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Purchases
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Plastic
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60,000
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$5.65
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$339,000
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Metal
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30,000
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$6.00
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$180,000
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Usage
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Plastic
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56.000
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55.00-
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280,000
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Metal
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23,000
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$6.00
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138,000
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Direct labor
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9,300 hours @ $6.00 per hour
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55,800
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5,600 hours @ $8.00 per hour
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44,800
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Manufacturing overhead
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Variable
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Supplies
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43,000
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18,000
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Power
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50,000
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15,000
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Employee benefits
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19,000
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12,000
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Fixed
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Supervision
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14,000
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11,000
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Depreciation
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12,000
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9,000
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Property taxes and other items
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1,900
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1,300
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Plastic Model
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MetalModel
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Raw Material
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$5.00
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$6.00
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Direct labor
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1/6 hour @ $6.00 per DLH
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1.00
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¼ hour @ $8.00 per DLH
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2.00
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Variable overhead
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1/6 hour @ $32.00 per DLH
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2.00
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¼ hour @ $8.00 per DLH
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2.00
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Standard variable manufacturing cost per unit
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$8.00
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$10.00
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Budgeted fixed costs per month
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Supervision
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$4.500
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$3.500
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Depreciation
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4.000
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3.000
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Property taxes and other items
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600
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400
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Total budgeted fixed costs for month
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$9.100
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$6.900
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Analyze the causes of the $32,600 unfavorable income variance.