Question

Question 1 You are the senior management accountant for Carvalino Ltd. Carvalino Ltd produces bedroom furniture made entirely from oak (a type of hardwood). Carvalino Ltd has positioned itself as a manufacturer of high-quality bedroom furniture, which it sells to a range of furniture retailers. Carvalino Ltd is broken down into various divisions, with each division focusing on the production of one particular type of bedroom furniture. Two of these divisions, Divisions A and B. produce wardrobes and beds respectively. You have received the email below from your Managing Director (Helen Gregory) in connection with both Divisions A and B: Hi, I need you to complete two tasks for me relating to the variances for Division A and Division B for last month. Division A This division has been struggling recently and (as you know) the previous production manager left the company a few months ago. The new production manager is now in place and last month was her first full month in charge. I had previously explained to her that there were two key issues that needed to be addressed, and at a recent meeting she assured me that they have both been tackled. The two issues were: The oak being sourced was of poor quality • Staff morale in the factory was very low I have included Division A's variance report for last month in Attachment 1 to this email. The standard cost per wardrobe hasn't yet been altered for any changes implemented by the new production manager. Based on the information provided please could you explain possible reasons for the variances and also comment on the performance of the new production manager? Division B The actual financial information for last month has just been received from Division B and is included in Attachment 2. Please could you provide me with a reconciliation of budgeted to actual contribution for last month for Division B, by means of the sales, material, labour and variable overhead variances? Many thanks, Helen The two attachments to the above email are shown on the next page.

Answer 1

a) From the variances of Div A it is clear that the volume of sales was more than budget but the unit sales price was lower than budget.

On the cost side, the material price variance is adverse, means the the problem of poor quality oak has been addresses but that has resulted in higher price than budgetd.

The same is reflected favorable material usage variance.

The labor morale has been taken care of , that is reflected in favorable labor efficiency variance, but that has resulted in some increase in labor pay rate reflected by adverse labor rate variance.

All the results reflect that the new Production Manager has taken care of the core issues but that has resulted in some cost escalation.

b)

Amount in Pound
Div B Details	Budget	Actual
Sales Volume	5400	5240
Unit Sales Price	299	278
Total Sales	1,614,600	1,456,720
Material rate	32	29
Direct Labor rate	13.25	13.75
Variable OH	2.75	2.55

A	Sales Price Variance=Actual Qty *(Actual Price-Std Price)
	Sales Price Variance=5240*(278-299)	(110,040)	U
	Sales Vol Variance= Std Sales Price*(Actual Qty-Std Qty)
	=299*(5240-5400)	(47,840)	U
	Sales Value Variance =Actual Sales -Budgeted sales
	=1456720-1614600	(157,880)	U
1	Direct Materials Price Variance= Actual Qty Used( Actual Rate-Std Rate)
	=23056*(29-32)=	69,168	(F)
2	Direct Material Efficiency Variance =Std Rate ( Actual Qty used-Std qty for actual output)
	=32*(23056-4.2*5240)=	(33,536)	(U)
3	Total Direct Material spending Variance=	=5240*32*4.2-668624	=		35,632	(F)
4	Direct Labor Rate Variance= Actual Hrs Used( Actual Rate-Std Rate)
	=15720*(13.75-13.25)=	(7,860)	(U)
5	Direct Labor Efficiency Variance =Std Rate ( Actual Hrs used-Std Hrs for actual output)
	=13.25*(15720-3.4*5240)=	27,772	(F)
6	Total Direct LAbor spending Variance=	=216150-5240*3.4*13.25	=		19,912	(F)
7	Variable Overhead Rate Variance= Actual Qty Used( Actual Rate-Std Rate)
	=15720*(2.55-2.75)=	3,144	(F)
8	Variable Overhead Efficiency Variance =Std Rate ( Actual Qty used-Std qty for actual output)
	=2.75*(15720-5240*3.4)=	5,764	(F)
9	Total Variable Overhead spending Variance=	=40086-9.35*5240	8,908	(F)

c) Reco of Contribution Variance
Actual Contribution	$       531,860
Actual Contribution/unit	$         101.50
Budgeted Contribtion /unit	$         110.20
Difference in per unit Contribution	$            (8.70)
Total Difference for 5240 units sold	$        (45,588)
Now we have the following variances;
Sales Price variance	(110,040)
Total Material Spend Variance	35,632
Total Labor spending variance	19,912
Total Var OH spending variance	8,908
Net of All variances	(45,588)
So Net of the variances = Contribution Margin Variance.