Question

Part Nine
in December (month 24) of year 2 of operations, Big Al’s produced and sold 32,675 pizzas, consisting of 30,570 meat pizzas and 2,105 veggie pizzas. The budgeted sales price for meat pizzas was $5.00, and for veggie pizzas, $5.25. The estimated production and sales during December was 31,678 meat pizzas and 2,595 veggie pizzas.

Required:
A. Compute the price and volume variances for sales, assuming that Big Al’s sold all pizzas produced for $137,565 (meat) and $9,051 (veggie). What might explain these variances?
B. Compute the price and quantity variances for direct materials for each type of pizza, assuming that Big Al’s paid $29,093 for 32,325 units of raw material for meat pizzas and $1,453 for 2,401 units of raw material for veggie pizzas.(A unit consists of dough shell, sauce, cheese, meat or veggies, and assembly materials.) In addition, 30,995 units were used to produce meat pizzas, and 2,149 units were used to produce veggie pizzas. How would these variances be interpreted? What might explain these variances? Would you consider them to be large enough to be important?
C. Compute the labor rate and efficiency variances, assuming that Big Al’s paid $71,350 in labor costs for 7,150 hours of labor for meat pizzas and $6,425 in labor costs for 650 hours of labor for veggie pizzas. How would these variances be interpreted? What might explain them? Would you consider them large enough to be important?

D. Using the predetermined overhead rate from Part 3 (with direct labor hours as the cost driver), compute the variable overhead rate and efficiency variances. Assume that Big Al’s paid $20,852 in total overhead costs, consisting of $17,002 of variable overhead and $3,850 of fixed overhead. How would these variances be interpreted? What might explain these variances? Would you consider them large enough to be important?
E. How might Big Al’s extend its variance analysis to be compatible with its use of activity-based costing as discussed in Part 3?

Answer 1

A) Price variance for sales(sales price variance)= (Actual price - Budgeted price) x Actual quantity sold

sales price variance for Meat pizza:

Actual price= $137,565/30,570= $4.5/unit

Budgeted price= $5.00/unit

Actual quantity sold= 30,570 units

= ($4.5 - $5.00) x 30,570 = $152,85 U

sales price variance for Veggie pizza:

Actual price= $9,501/2,105= $4.3/unit

Budgeted price= $5.25

Actual quantity sold= 2,105 units

=($4.3 -$5.25) x 2,105 =$2,000 U

Total sales price variance = $15,285 U +  $2,000 U= $17,285 U

Volume variance for sales(Sales volume variance)= (Actual quantity sold - Budgeted quantity sold) x Budgeted selling price

Sales volume variance for meat pizza:

Actual quantity sold= 30,570 units

Budgeted quantity sold= 31,678 units

Budgeted price= $5.00/unit

= (30,570 - 31,678) x $5= $5,540 U

Sales volume variance for meat pizza:

Actual quantity sold= 2,105 units

Budgeted quantity sold= 2,595 units

Budgeted price= $5.25/unit

= (2,105 - 2,595) x $5.25= $2,572.5 U

Total sales volume variance= $5,540 U + $2,572.5 U =8,112.5 U

Explanation: Big AI's Meat pizza and Veggie pizza have Unfavorable variance for both sales price variance and sales volume variance. The cause of the variances is lower selling price and lower quantity sold than budgeted selling price and Budgeted quantity sold for both products.

B) Material price variance= (actual price - standard price) x actual quantity of material used

Material price variance cannot be computed for this question because, standard price of raw material is not given for the both Meat pizza and Veggie pizza

Material Quantity Variance=(Actual quantity of raw material used - Standard quantity of raw material allowed for actual production) x Standard price of raw material

  Material quantity variance cannot be computed for this question because, standard price of raw material and Standard quantity of raw material allowed for actual production is not given for the  both Meat pizza and Veggie pizza.

C) Labor rate variance = (Actual rate of labor - standard rate of labor) x Actual labor hours used

    Labor rate variance cannot be computed for this question because, standard rate of raw material is not given for the both Meat pizza and Veggie pizza.

Labor efficiency variance= (Actual labor hours used - Standard labor hours allowed for production) x Standard rate of labor

Labor efficiency variance cannot be computed for this question because, standard price of labor and Standard labor hours allowed for actual production is not given for the  both Meat pizza and Veggie pizza.

D) Variable Overhead rate(spending) variance= (Actual variable overhead rate - predetermined variable overhead rate) x Actual allocation based used for production.

Variable overhead is allocated on the basis of labor hours.

Variable overhead rate variance cannot be computed for this question because, predetermined variable overhead rate   and is not given for the  both Meat pizza and Veggie pizza.

Variable overhead efficiency variance= (Actual allocation base used - Standard allocation base allowed for production)

x Predetermined variable overhead rate

Variable overhead is allocated on the basis of labor hours.

Variable overhead efficiency variance cannot be computed for this question because, Predetermined variable overhead rate and Standard labor hours allowed for actual production is not given for both Meat and Veggie pizza.

E) Big Al can extend its variance analysis to be compatible with its use of activity-based costing by using cost variance with activity based costing much like using cost variance analysis with traditional costing. Both utilize a spending variance and an efficiency variance. However, activity based costing requires calculating a spending and efficiency variance for each activity rather than only activity base(here, labor hours) typically used in traditional costing.

Note:

If needed information is given i can help you to compute the questions B, C, D.