91Ó°ÊÓ

Ellis Animal Health, Inc., produces a generic medication used to treat cats with feline diabetes. The liquid medication is sold in \(100 \mathrm{ml}\) vials. Ellis employs a team of sales representatives who are paid varying amounts of commission. Given the narrow margins in the generic veterinary drugs industry, Ellis relies on tight standards and cost controls to manage its operations. Ellis has the following budgeted standards for the month of April 2017: Ellis budgeted sales of 700,000 vials for April. At the end of the month, the controller revealed that actual results for April had deviated from the budget in several ways: \- Unit sales and production were \(90 \%\) of plan. \- Actual average selling price decreased to \(\$ 8.20\) " \- Productivity dropped to 90 vials per hour. \- Actual direct manufacturing labor cost was \(\$ 15.20\) per hour \- Actual total direct material cost per unit increased to \(\$ 3.90\). \- Actual sales commissions were \(\$ 0.70\) per vial. \- Fixed overhead costs were \(\$ 110,000\) above budget. Calculate the following amounts for Ellis for April 2017: 1\. Static-budget and actual operating income 2\. Static-budget variance for operating income 3\. Flexible-budget operating income 4\. Flexible-budget variance for operating income 5\. Sales-volume variance for operating income 6\. Price and efficiency variances for direct manufacturing labor 7\. Flexible-budget variance for direct manufacturing labor

Step by step solution

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1. Static-budget and actual operating income

Static-budget: - Budgeted sales: 700,000 vials - Selling price: \( \$10 \) per vial - Total sales: \( 700,000 \times \$10 = \$7,000,000 \) Actual results: - Unit sales: \( 90\% \) of plan, so \( 700,000 \times 0.9 = 630,000 \) vials - Selling price: \( \$8.20 \) per vial - Total sales: \( 630,000 \times \$8.20 = \$5,166,000 \) Next, we will find the static-budget variance for operating income.

02

2. Static-budget variance for operating income

Static-budget variance for operating income = Actual operating income - Static-budget operating income = \( \$5,166,000 - \$7,000,000 = -\$1,834,000 \) Now we will calculate the flexible-budget operating income.

03

3. Flexible-budget operating income

Flexible-budget operating income can be calculated by dividing the static budget operating income by the percentage of plan achieved. Flexible-budget operating income = \( \frac{\$7,000,000}{0.9} = \$7,777,777.78 \) Next, we'll find the flexible-budget variance for operating income.

04

4. Flexible-budget variance for operating income

Flexible-budget variance for operating income = Actual operating income - Flexible-budget operating income = \( \$5,166,000 - \$7,777,777.78 = -\$2,611,777.78 \) Now, let's calculate the sales-volume variance for operating income.

05

5. Sales-volume variance for operating income

Sales-volume variance for operating income = Static-budget operating income - Flexible-budget operating income = \( \$7,000,000 - \$7,777,777.78 = -\$777,777.78 \) Next, we will find the price and efficiency variances for direct manufacturing labor.

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6. Price and efficiency variances for direct manufacturing labor

Price variance = (Actual direct manufacturing labor cost - Budgeted direct manufacturing labor cost) per hour = \( \$15.20 - \$15.00 = \$0.20 \) Efficiency variance = (Actual productivity - Budgeted productivity) in vials per hour = \( 90 - 100 = -10 \) vials per hour Finally, we'll calculate the flexible-budget variance for direct manufacturing labor.

07

7. Flexible-budget variance for direct manufacturing labor

Flexible-budget variance for direct manufacturing labor = (Actual direct material cost per unit - Budgeted direct material cost per unit) + Actual sales commissions = \( \$3.90 - \$3.00 + \$0.70 = \$1.60 \)

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Static-budget variance

The static-budget variance is a crucial concept in cost accounting that helps businesses compare their actual performance against a predetermined budget. The variance shows how much the actual results deviate from what was originally planned. In the case of Ellis Animal Health, the static-budget variance for operating income is calculated by subtracting the static-budget operating income from the actual operating income. This represents the difference between what was expected and what actually occurred in April 2017. A favorable variance indicates better than expected performance, while an unfavorable variance, like the -$1,834,000 for Ellis, suggests a shortfall from expectations. Understanding this variance helps managers identify areas where performance did not meet expectations and take corrective actions.

Flexible-budget variance

Flexible-budget variance is another key term in cost accounting, which evaluates the difference between the actual performance and a flexible budget. A flexible budget adjusts the static budget for actual levels of output or activity, providing a more accurate assessment of performance. In the exercise, Ellis Animal Health's flexible-budget variance is calculated as the difference between the actual operating income and flexible-budget operating income. This variance considers the decreased sales units due to a drop in production or market conditions. For April 2017, Ellis faced an unfavorable flexible-budget variance of -$2,611,777.78, indicating that the company performed worse than the adjusted expectations. The variance analysis here can help pinpoint inefficiencies or cost overruns.

Sales-volume variance

Sales-volume variance is an important metric that shows the impact of a difference in sales volume from the original forecast. It measures the effect of selling fewer or more units than planned. In Ellis Animal Health's situation, the sales-volume variance is calculated between the static-budget and the flexible-budget operating incomes. The result, -$777,777.78, indicates that selling fewer units than planned had a negative financial impact. Sales-volume variance is highly influential in strategic decisions, providing insights into demand fluctuations and market trends, helping companies adjust their strategies to better align with market realities.

Direct manufacturing labor variances

Direct manufacturing labor variances involve analyzing cost differences associated with labor concerning what was budgeted and what actually occurred. These variances include both price and efficiency variances which help in assessing how effectively labor resources are managed. Price variance for Ellis is calculated by examining the difference between the actual and budgeted direct labor costs per hour ($0.20 per hour more than planned). Efficiency variance looks at the change in productivity, with Ellis producing 10 fewer vials per hour than budgeted. Identifying these labor variances is essential for managers to understand if labor costs are overshoot due to higher rates or inefficiencies in labor productivity, facilitating remedial measures to optimize labor use.