Murphy Inc. manufactures a single product, DLZ. Murphy uses budgets and standard
ID: 2531363 • Letter: M
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)
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
Explanation / Answer
2.
3. a. Material cost variances
Working:
3.b. Labor cost variances:
Working:
3.c. Variable overhead cost variances:
Working:
4. Variance reconciliation:
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 700000Related Questions
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