Smith Variance Case Smith Inc. manufactures a single product, ABG. Smith uses bu
ID: 2480365 • Letter: S
Question
Smith Variance Case
Smith Inc. manufactures a single product, ABG. Smith uses budgets and standards in its planning and control functions. Smith 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 ABG would be used in the calculation.
Exhibit A
Budgeted (Standard) Variable Costs Per Unit of ABG
Raw material: 2 pounds at $5 per pound $10
Direct labor: 1 direct labor hour at $12 per hour 12
Variable overhead: 1 direct labor hour at $8 per hour 8
Total variable budgeted (standard) cost per ABG 30
__________________________________________________________________
The standards for fixed manufacturing overhead costs are: 1 direct labor hour at $7.5 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 50,000 units of ABG. The budgeted sales price is $48 per unit, and total budgeted fixed selling and administrative costs are $125,000. There are no variable selling and administrative costs in this firm.
The company actually produced and sold 42,000 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
Smith Inc.
Actual Income Statement
Sales:
42,000 units produced and sold at $50 $2,100,000
Less Variable Costs:
Direct materials (75,000 pounds at $5.25 per pound) 393,750
Direct labor (40,000 direct labor hours at $12.75/hr.) 510,000
Variable manufacturing overhead 360,000
Contribution margin 836,250
Less Fixed Costs:
Fixed manufacturing overhead costs 370,000
Fixed selling and administrative costs 140,000
Net operating income $ 326,250
_______________________________________________________________
Required:
1. 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.
Smith Variance Case Solution Template for Part 1
Actual Revenue & Spending Flexible Activity Planning
result variances budgets Variances Budget
Sales
Less V.C.
DM
DL
V-OH
CM
Less FC
Manufacturing
Sell & Admin
NOI
Explanation / Answer
Smith Inc
Flexible budget performance report Abstract
For the Year
Activity variances
U/F
Revenue and Spending variances
U/F
Actual Results
Flexible budget
Planning budget
Sales
384,000
U
84,000
F
2,100,000
2,016,000
2,400,000
Less: VC
DM
80,000
F
26,250
F
393,750
420,000
500,000
DL
96,000
F
6,000
U
510,000
504,000
600,000
V-oh
64,000
F
24,000
U
360,000
336,000
400,000
CM
144,000
U
80,250
F
836,250
756,000
900,000
Less: FC
Manufacturing
-
5,000
F
370,000
375,000
375,000
Selling and Admin
-
15,000
U
140,000
125,000
125,000
NOI
144,000
U
70,250
F
326,250
256,000
400,000
Smith Inc
Flexible budget performance report Abstract
For the Year
Activity variances
U/F
Revenue and Spending variances
U/F
Actual Results
Flexible budget
Planning budget
Sales
384,000
U
84,000
F
2,100,000
2,016,000
2,400,000
Less: VC
DM
80,000
F
26,250
F
393,750
420,000
500,000
DL
96,000
F
6,000
U
510,000
504,000
600,000
V-oh
64,000
F
24,000
U
360,000
336,000
400,000
CM
144,000
U
80,250
F
836,250
756,000
900,000
Less: FC
Manufacturing
-
5,000
F
370,000
375,000
375,000
Selling and Admin
-
15,000
U
140,000
125,000
125,000
NOI
144,000
U
70,250
F
326,250
256,000
400,000
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