Question

At the end of 1923, Al Kapon vice president of Chicago Syndicate, Inc. stared out the window of his posh west side office in dismay. His expectations for a highly profitable year were dashed. The disappointing results appear below:

	Plan	Actual	Variance
Sales	$500,000	$456,000	$44,000
Direct materials	50,000	48,000	2,000	F
Direct labor	200,000	201,000	1,000	U
Variable OH	100,000	92,000	8,000	F
Total variable cost	350,000	341,000	9,000	F
Contribution Margin	150,000	115,000	35,000
Fixed costs	100,000	98,000	2,000	F
Syndicate profit	50,000	17,000	33,000	U

Mr. Kapon realized that because sales were down expenses should also fall, such that profit should be somewhat more than $17,000. His organization which made only one product (the identity of which cannot be disclosed), incorporated the following data into its plans.

STANDARD COST AND CONTRIBUTION MARGIN
Selling price		$10
direct materials (2 quarts @ .50/qt)	$1
direct labor (.8 hour at $5/hr)	4
variable overhead ($2.50/DLH)	2	7
Standard contribution margin		3

The firm planned sales of 50,000 units but sold only 48,000. Materials bought and used were 100,000 quarts. Direct labor hours were 40,000. Production was 48,000 units.

REQUIRED:    

Prepare the necessary analysis to explain why the syndicate profit is $33,000 below what

is expected. Compute the detailed variances that would explain the above analysis.

Answer 1

ANSWER

• All working forms part of the answer
• There has been an Unfavourable variance of $ 33,000 in Syndicate profits.
• Such variance exist due to the fact that ‘less volume of unit is sold’ and ‘excess or shortfall of budgeted cost over actual cost’
• The analysis for such variance is provided below:

	Actual Data	Spending variance		Flexible Budget Data	Activity variance		Static Budget Data
	[A]	[Difference between A & B]		[B]	[Difference between B & C]		[C]
Units Sold	48000	0	None	48000	2000	Unfavourable	50000
Sales Revenue	$                       4,56,000.00	$                        24,000.00	Unfavourable	$                        4,80,000.00	$                         20,000.00	Unfavourable	$                    5,00,000.00
Less: Variable Cost
Direct Material	$                           48,000.00	$                                       -	None	$                            48,000.00	$                            2,000.00	Favourable	$                        50,000.00
Direct labor	$                       2,01,000.00	$                          9,000.00	Unfavourable	$                        1,92,000.00	$                            8,000.00	Favourable	$                    2,00,000.00
Variable Overhead	$                           92,000.00	$                          4,000.00	Favourable	$                            96,000.00	$                            4,000.00	Favourable	$                    1,00,000.00
Total variable Cost	$                       3,41,000.00	$                          5,000.00	Unfavourable	$                        3,36,000.00	$                         14,000.00	Favourable	$                    3,50,000.00
Contribution margin	$                       1,15,000.00	$                        29,000.00	Unfavourable	$                        1,44,000.00	$                            6,000.00	Unfavourable	$                    1,50,000.00
Less: Fixed Costs	$                           98,000.00	$                          2,000.00	Favourable	$                        1,00,000.00	$                                         -	None	$                    1,00,000.00
Net Income /Profits	$                           17,000.00	$                        27,000.00	Unfavourable	$                            44,000.00	$                            6,000.00	Unfavourable	$                        50,000.00

• Hence, from the above analysis and special attention to Net Income Row (Syndicate profits), it can be seen that out of $ 33,000 Unfavourable variance, $ 6,000 unfavourable variance is due to the fact that LESS number of units are sold than budgeted, and $ 27,000 unfavourable variance is due to lower actual sale price and higher actual cost.
• The detail variance analysis (Spending Variance) column is provided below from understanding:

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        0.50	-	$                       0.48	)	x	100000
	2000
	Variance		2000			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	96000	-	100000	)	x	$                           0.50
	-2000
	Variance		2000			Unfavourable-U
Material Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$             48,000.00	-	$            48,000.00	)
	0
	Variance		0			Favourable-F
Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        5.00	-	$                       5.03	)	x	40000
	-1000
	Variance		1000			Unfavourable-U
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	38400	-	40000	)	x	$                           5.00
	-8000
	Variance		8000			Unfavourable-U
Labor Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$         1,92,000.00	-	$        2,01,000.00	)
	-9000
	Variance		9000			Unfavourable-U
Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        2.50	-	$                       2.30	)	x	40000
	8000
	Variance		8000			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	38400	-	40000	)	x	$                           2.50
	-4000
	Variance		4000			Unfavourable-U
Variable Overhead Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$             96,000.00	-	$            92,000.00	)
	4000
	Variance		4000			Favourable-F

_____________________________________________

If you have any query or any Explanation please ask me in the comment box, i am here to helps you.please give me positive rating.

*****************THANK YOU**************