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Chapter 23: Q16E (page 1310)

Murphy Company managers received the following incomplete performance report:

Units Actual Results Flexible Budget Variance Static Budget Flexible Budget Sales Volume Variance Sales Revenue Contribution Margin Fixed Expenses Operating Income 35,000 (a) (b) 5,000 F \( 29,000 \) 14,000 105,000 0 \( 219,000 \) 27,000 F 85,000 13,000 MURPHY COMPANY Flexible Budget Performance Report For the Year Ended July 31, 2018 134,000 14,000 35,000 \( 35,000 100,000 \) 219,000 84,000 135,000 (c) (d) (e) (f) (h) (g) (i) (j) (k) (l)

Complete the performance report. Identify the employee group that may deserve praise and the group that may be subject to criticism. Give your reasoning.

Short Answer

Expert verified

The flexible budget performance reports are prepared as per the data provided. The sales team is performing well but on the other hand, the performance of the production and administration team is not up to the mark.

Step by step solution

01

Preparation of flexible budget

Murphy Company

Flexible Budget Performance Report

For the year ended July 31, 2018

Actual ($)

Flexible Budget Variance ($)

Flexible Budget ($)

Sales Volume Variance

Static Budget

Units

35,000

0

35,000

5,000 F

30,000

Sales Revenue

219,000

0

219,000

27,000 F

192,000

Variable expenses

85,000

1,000 U

84,000

13,000 U

71,000

Contribution Margin

134,000

1,000 U

135,000

14,000 F

121,000

Fixed Expenses

105,000

5,000 U

100,000

0

100,000

Operating Income

29,000

6,000 U

35,000

14,000 F

21,000

02

Preparation of flexible budget

The sales team or group of the company deserves praise as they have achieved better sales volume than the budgeted sales volume, which is reflected by the volume variance.

The group responsible for production and administration deserves criticism as the actual variable expenses and fixed expenses have gone up in comparison to the amounts shown in the budgets, which are reflected by flexible budget variance for variable costs (1,000 U) and flexible budget variance for fixed expenses (5,000 U).

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Most popular questions from this chapter

Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had recently been hired to update the accounting system and speed up the reporting process.

鈥淲hat鈥檚 taking so long?鈥� Drew asked. 鈥淲hen am I going to get the variance reports?鈥� Jeff sighed and attempted to explain the problem. 鈥淪ome of the variances appear to be way off. We either have a serious problem in production, or there is an error in the spreadsheet. I want to recheck the spreadsheet before I distribute the report.鈥� Drew pulled up a chair, and the two men went through the spreadsheet together. The formulas in the spreadsheet were correct and showed a large unfavorable direct labor efficiency variance. It was time for Drew and Jeff to do some investigating.

After looking at the time records, Jeff pointed out that it was unusual that every employee in the production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no one ever five minutes late getting back from lunch? What about clean颅up time between jobs or at the end of the day?

Drew began to observe the production laborers and noticed several disturbing items. One employee was routinely late for work, but his time card always showed him clocked in on time. Another employee took 10颅 to 15颅minute breaks every hour, averaging about 1 hours each day, but still reported eight hours of direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his time card showed him clocked in on time. No one in the production area ever reported any 鈥渄own time鈥� when they were not working on a specific job, even though they all took breaks and completed other tasks such as doing clean颅up and attending department meetings.

Requirements

1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?

2. How might an employee鈥檚 time card show the employee on the job and working when the team member was not present?

3. Why would the employees鈥� activities be considered fraudulent?

Question:Match the variance to the correct definition.

Variance Definition

2. Cost variance

3. Efficiency variance

4. Flexible budget variance

5. Sales volume variance

6. Static budget variance

a. The difference between the expected results in the flexible budget for the actual units sold and the static budget.

b. The difference between actual results and the expected results in the flexible budget for the actual units sold.

c. Measures how well the business keeps unit costs of material and labor inputs within standards.

d. The difference between actual results and the expected results in the static budget.

e. Measures how well the business uses its materials or human resources

Question:Match the product cost variance with the manager most probably responsible. Some answers may be used more than once. Some answers may not be used.

Variance Manager

19. Variable overhead cost variance

20. Direct materials efficiency variance

21. Direct labor cost variance

22. Fixed overhead cost variance

23. Direct materials cost variance

a. Human resources

b. Purchasing

c. Production

Briefly describe how journal entries differ in a standard cost system.

Identifying the benefits of standard costs

Setting standards for a product may involve many employees of the company. Identify some of the employees who may be involved in setting the standard costs, and describe what their role might be in setting those standards.
See all solutions

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