Solutions of Management

Accounting Exercises
Dr. Md. Ali Arshad Chowdhury
Professor
Department of Accounting
University of Chittagong
 EX:10-1 (1)
• Number of helmets............................................ 35,000
• Standard kilograms of plastic per helmet............. × 0.6
• Total standard kilograms allowed....................... 21,000
• Standard cost per kilogram................................ × $8
• Total standard cost............................................
$168,000
• Actual cost incurred (given)...............................
$171,000
• Total standard cost (above)............................... 168,000
• Total material variance—unfavorable.................. $ 3,000
 EX:10-1 (2)
• The variances can be computed using the
formulas:
Materials price variance = AQ (AP – SP)
• 22,500 kilograms ($7.60 per kilogram* – $8.00 per
kilogram) = $9,000 F
* $171,000 ÷ 22,500 kilograms = $7.60 per kilogram
Materials quantity variance = SP (AQ – SQ)
• $8 per kilogram (22,500 kilograms – 21,000
kilograms) = $12,000 U
 10-2(1)
• Number of meals prepared.................... 4,000
• Standard direct labor-hours per meal..... × 0.25
• Total direct labor-hours allowed............. 1,000
• Standard direct labor cost per hour........ × $9.75
• Total standard direct labor cost............. $9,750
• Actual cost incurred.............................. $9,600
• Total standard direct labor cost (above). 9,750
• Total direct labor variance..................... $ 150
Favorable
 10-2(2)
• The variances can be computed using the
formulas:
• Labor rate variance = AH(AR – SR)
= 960 hours ($10.00 per hour – $9.75 per hour)
= $240 U
• Labor efficiency variance = SR(AH – SH)
= $9.75 per hour (960 hours – 1,000 hours)
= $390 F
 10-3(1)
• 1. Number of items shipped.................................
120,000
• Standard direct labor-hours per item................ × 0.02
• Total direct labor-hours allowed....................... 2,400
• Standard variable overhead cost per hour......... × $3.25
• Total standard variable overhead cost.............. $ 7,800
• Actual variable overhead cost incurred.............. $7,360
• Total standard variable overhead cost (above). . 7,800
• Total variable overhead variance...................... $ 440
Favorable
 10-3(2)
• The variances can be computed using the
formulas:
• Variable overhead rate variance:
AH(AR – SR) = 2,300 hours ($3.20 per hour –
$3.25 per hour) = $115 F
• Variable overhead efficiency variance:
SR(AH – SH) = $3.25 per hour (2,300 hours –
2,400 hours) = $325 F
 10-4(1)
• Number of units manufactured............................. 20,000
• Standard labor time per unit
• (18 minutes ÷ 60 minutes per hour).................. × 0.3
• Total standard hours of labor time allowed............ 6,000
• Standard direct labor rate per hour....................... × $12
• Total standard direct labor cost............................. $72,000
• Actual direct labor cost......................................... $73,600
• Standard direct labor cost.................................... 72,000
• Total variance—unfavorable.................................. $ 1,600
 10-4(2)
• The variances can be computed using the
formulas:
• Labor rate variance = AH (AR – SR)
• 5,750 hours ($12.80 per hour* – $12.00 per
hour) = $4,600 U
*$73,600 ÷ 5,750 hours = $12.80 per hour
• Labor efficiency variance = SR (AH – SH)
• $12.00 per hour (5,750 hours – 6,000 hours) =
$3,000 F
 10-4(3)
• The variances can be computed using the formulas:
• Variable overhead rate variance = AH (AR – SR)
• 5,750 hours ($3.80 per hour* – $4.00 per hour) =
$1,150 F
• *$21,850 ÷ 5,750 hours = $3.80 per hour
• Variable overhead efficiency variance = SR (AH –
SH)
• $4.00 per hour (5,750 hours – 6,000 hours) =
$1,000 F
 10-5(1)
If the labor spending variance is $93 unfavorable, and the rate variance is $87
favorable, then the efficiency variance must be $180 unfavorable, because the
rate and efficiency variances taken together always equal the spending variance.
Knowing that the efficiency variance is $180 unfavorable, one approach to the
solution would be:
• Efficiency variance = SR (AH – SH)
• $9.00 per hour (AH – 125 hours*) = $180 U
• $9.00 per hour × AH – $1,125 = $180**
• $9.00 per hour × AH = $1,305
• AH = $1,305 ÷ $9.00 per hour
• AH = 145 hours
• *50 jobs × 2.5 hours per job = 125 hours
• **When used with the formula, unfavorable variances are positive and
favorable variances are negative.
 10-5(2)
• Rate variance = AH (AR – SR)
• 145 hours (AR – $9.00 per hour) = $87 F
• 145 hours × AR – $1,305 = –$87*
• 145 hours × AR = $1,218
• AR = $1,218 ÷ 145 hours
• AR = $8.40 per hour
*When used with the formula, unfavorable
variances are positive and favorable variances are
negative
 10-6(1)
• The variances can be computed using the
formulas:
• Materials price variance = AQ (AP – SP)
• 20,000 pounds ($2.35 per pound – $2.50 per
pound) = $3,000 F
• Materials quantity variance = SP (AQ – SQ)
• $2.50 per pound (20,000 pounds – 18,400
pounds) = $4,000 U
 10-6(2)
• The variances can be computed using the
formulas:
• Labor rate variance = AH (AR – SR)
• 750 hours ($13.90 per hour* – $12.00 per hour)
= $1,425 U
• *10,425 ÷ 750 hours = $13.90 per hour
• Labor efficiency variance = SR (AH – SH)
• $12.00 per hour (750 hours – 800 hours) = $600
F
 10-7
• The variances can be computed using the
formulas:
• Materials price variance = AQ (AP – SP)
• 20,000 pounds ($2.35 per pound – $2.50 per
pound) = $3,000 F
• Materials quantity variance = SP (AQ – SQ)
• $2.50 per pound (14,750 pounds – 13,800
pounds) = $2,375 U
 10-9(1)
• The variances can be computed using the
formulas:
• Materials price variance = AQ (AP – SP)
• 12,000 yards ($3.80 per yard* – $4.00 per yard)
= $2,400 F
• *$45,600 ÷ 12,000 yards = $3.80 per yard
• Materials quantity variance = SP (AQ – SQ)
• $4.00 per yard (12,000 yards – 11,200 yards) =
$3,200 U
 10-9(2)
• The variances can be computed using the
formulas:
• Labor rate variance = AH (AR – SR)
• 2,800 hours ($6.50 per hour* – $6.00 per hour)
= $1,400 U
• *$18,200 ÷ 2,800 hours = $6.50 per hour
• Labor efficiency variance = SR (AH – SH)
• $6.00 per hour (2,800 hours – 3,000 hours) =
$1,200 F
 10-9(3)
• The variances can be computed using the formulas:
• Variable overhead rate variance = AH (AR – SR)
• 2,800 hours ($2.50 per hour* – $2.40 per hour) =
$280 U
• *$7,000 ÷ 2,800 hours = $2.50 per hour
• Variable overhead efficiency variance = SR (AH – SH)
• $2.40 per hour (2,800 hours – 3,000 hours) = $480 F
 12-2
Alternative Solution: Current Total If Difference:
Total Racing Bikes Net Operating
Are Dropped Income Increase or
(Decrease)
Sales .......................................... $300,000 $240,000 $(60,000)
Variable expenses ....................... 120,000 87,000 33,000
Contribution margin..................... 180,000 153,000 (27,000)
Fixed expenses:
Advertising, traceable ............... 30,000 24,000 6,000
Depreciation on
special equipment* ................... 23,000 23,000 0
Salaries of product managers .... 35,000 25,000 10,000
Common allocated costs ........... 60,000 60,000 0
Total fixed expenses .................... 148,000 132,000 16,000
Net operating income .................. $ 32,000 $ 21,000 $ (11,000)
*Includes pro-rated loss on the special equipment if it is disposed of
 12-2(2)
• The segmented report can be improved by eliminating the allocation of the common fixed
expenses. Following the format introduced in Chapter 12 for a segmented income statement, a
better report would be:
Total Dirt Bikes Mountain Bikes Racing Bikes
Sales ........................... $300,000 $90,000 $150,000 $60,000
Variable manufacturing
and selling expenses .... 120,000 27,000 60,000 33,000
Contribution margin ..... 180,000 63,000 90,000 27,000
Traceable fixed expenses:
Advertising ..................... 30,000 10,000 14,000 6,000
Depreciation of special
equipment ..................... 23,000 6,000 9,000 8,000
Salaries of the product
line managers ................35,000 12,000 13,000 10,000
Total traceable fixed
expenses........................... 88,000 28,000 36,000 24,000
Product line segment margin 92,000 $35,000 $ 54,000 $ 3,000
Common fixed expenses ....... 60,000
Net operating income ........... $ 32,000
 12-3(1)
Per Unit Differential Costs 15,000 units
Make Buy Make Buy
Cost of purchasing ....................... $35 $525,000
Direct materials ........................... $14 $210,000
Direct labor ................................. 10 150,000
Variable manufacturing overhead . 3 45,000
Fixed manufacturing overhead,
traceable(1*) ................................. 2 30,000
Fixed manufacturing overhead,
common ...................................
Total costs .................................. $29 $35 $435,000 $525,000
Difference in favor of continuing to make the carburetors ................
$6 $90,000
(1*) Only the supervisory salaries can be avoided if the carburetors are purchased. The remaining book
value of the special equipment is a sunk cost; hence, the $4 per unit depreciation expense is not relevant
to this decision.
Based on these data, the company should reject the offer and should continue to produce the carburetors
internally.
 12-3(2)
• Make Buy
• Cost of purchasing (part 1) ............................ $525,000
• Cost of making (part 1) ..................$435,000
• Opportunity cost—segment margin foregone
on a potential new product line ...... 150,000
• Total cost ..........................................$585,000 $525,000
Difference in favor of purchasing from the outside
supplier .......................................... $60,000

Thus, the company should accept the offer and purchase the
carburetors from the outside supplier.
 12-5(1)
• The most profitable use of the constrained resource is determined by the contribution
margin per unit of the constrained resource. In part 1, the constrained resource is time on
the plastic injection molding machine. Therefore, the analysis would proceed as follows:
• Ski Golf Fishing
• Selling price per unit .................. $200 $300 $255
• Variable cost per unit ................ 60 140 55
• Contribution margin per unit (a) . $140 $160 $200
• Plastic injection molding machine
• processing time required
• to produce one unit (b) ............... 2 minutes 5 minutes 4 minutes
• Contribution margin per unit
• of the constrained resource
• (a) ÷ (b) ................................ $70 per minute $32 per minute $50 per minute
• Production of the Ski Guard product would be the most profitable use of the constrained
resource which is, in this case, time on the plastic injection molding machine. The
contribution margin per minute is $70 for this product, which is larger than for the other two
products.
 12-5(2)
• In this part, the constraint is the available pounds of plastic pellets.
• Ski Golf Fishing
• Selling price per unit ...............$200 $300 $255
• Variable cost per unit ................ 60 140 55
• Contribution margin per unit (a) $140 $160 $200
• Pounds of plastic pellets
• required to produce one unit (b) 7 pounds 4 pounds 8 pounds
• Contribution margin per unit of
• the constrained resource (a) ÷ (b) .$20 per $40 per $25 per
pound pound pound
In this case, production of the Golf Guard would be the most profitable use of
the constrained resource. The contribution margin per unit of the constrained
resource for this product is $40, which is larger than for the other two products
 12-5(3)
• The Fishing Guard product has the largest unit
contribution margin, but it is not the most
profitable use of the constrained resource in either
case above. This happens because the Fishing
Guard uses more of the constrained resources in
proportion to its contribution margin than the
other two products. In other words, more of the
other products can be produced for a given amount
of the constrained resource and this more than
makes up for their lower contribution margins.
 12-13
• Sales value after further processing
• (7,000 units × $12 per unit) .......................... $84,000
• Sales value at the split-off point
• (7,000 units × $9 per unit) ........................... 63,000
Incremental revenue from further processing ... 21,000
• Cost of further processing ............................... 9,500
• Profit from further processing ........................ $11,500
• The $60,000 cost incurred up to the split-off point is not
relevant in a decision of what to do after the split-off
point.
 Chapter-11
1.Last year’s margin is:
• Margin =Net operating income/Sales
= $200,000/$1,000,000= 20%
2. Last year’s turnover is:
Turnover = Sales/Average operating
assets=$1,000,000/$625,000
= 1.6
 Chapter-11
• 3. Last year’s return on investment (ROI) is:
ROI = Margin × Turnover= 20% × 1.6 = 32%
• 4. The margin for this year’s investment
opportunity is: Margin =Net operating
income/ Sales=$30,000/$200,00 = 15%
 Chapter-11
• 5. The turnover for this year’s investment
opportunity is:
• Turnover =Sales/Average operating
assets=$200,000/$120,000 = 1.67 (rounded)
6. The ROI for this year’s investment
opportunity is: ROI = Margin × Turnover= 15%
× 1.67 = 25% (rounded)
 Chapter-11
• If the company pursues the investment opportunity, this year’s
margin, turnover, and ROI would be:
• Margin = Net operating income/Sales
=($200,000 + $30,000)/($1,000,000 + $200,000)
=$230,000/$1,200,000
= 19.2% (rounded)
Turnover =Sales/Average operating assets
=($1,000,000 + $200,000)/($625,000 + $120,000)
=$1,200,000/$745,000
= 1.61 (rounded)
ROI = Margin × Turnover
= 19.2% × 1.61 = 30.9% (rounded)
 Chapter-11
• 10. The CEO would not pursue the investment
opportunity because it lowers her ROI from
32% to 30.9%. The owners of the company
would want the CEO to pursue the investment
opportunity because its ROI of 25% exceeds
the company’s minimum required rate of
return of 15%
 Chapter-11
11. Last year’s residual income is:
• Average operating assets ......................$625,000
• Net operating income ...........................$200,000
• Minimum required return:
• 15% × $625,000 ............................... 93,750
• Residual income ...................................$106,250
12. The residual income for this year’s investment opportunity is:
• Average operating assets ......................$120,000
• Net operating income ...........................$30,000
• Minimum required return:
• 15% × $120,000 ............................... 18,000
• Residual income ...................................$12,00
 Chapter-11
13. If the company pursues the investment
opportunity, this year’s residual income will be:
• Average operating assets ......................$745,000
• Net operating income ...........................$230,000
• Minimum required return:
• 15% × $745,000 ............................... 111,750
• Residual income ...................................$118,250
 Chapter-11
14. The CEO would pursue the investment opportunity because it
would raise her residual income by $12,000.
15. The CEO and the company would not want to pursue this
investment
opportunity because it does not exceed the minimum required
return:
• Average operating assets ......................$120,000
• Net operating income ...........................$10,000
• Minimum required return:
• 15% × $120,000 ............................... 18,000
• Residual income ...................................$ (8,000)