Comprehensive variance analysis, responsibility issues

(CMA, adapted) Ultra, Inc., manufactures a full line of well-known sunglasses frames and lenses. Ultra uses a standard costing system to set attainable standards for direct materials, labor, and overhead costs. Ultra reviews and revises standards annually as necessary. Department managers, whose evaluations and bonuses are affected by their department's performance, are held responsible to explain variances in their department performance reports.
Recently, the manufacturing variances in the Delta prestige line of sunglasses have caused some concern. For no apparent reason, unfavorable materials and labor variances have occurred. At the monthly staff meeting, John Puckett, manager of the Image line, will be expected to explain his variances and suggest ways of improving performance. Barton will be asked to explain the following performance report for 2014:

Barton collected the following information:
Three items comprised the standard variable manufacturing costs in 2014:

? Direct materials: Frames. Static budget cost of $35,880. The standard input for 2014 is 2.00 ounces per unit.
? Direct materials: Lenses. Static budget costs of $96,720. The standard input for 2014 is 4.00 ounces per unit.
? Direct manufacturing labor: Static budget costs of $140,400. The standard input for 2014 is 1 hour per unit.

Assume there are no variable manufacturing overhead costs.
The actual variable manufacturing costs in 2014 were as follows:

? Direct materials: Frames. Actual costs of $70,080. Actual ounces used were 4.00 ounces per unit.
? Direct materials: Lenses. Actual costs of $131,400. Actual ounces used were 6.00 ounces per unit.
? Direct manufacturing labor: Actual costs of $145,124. The actual labor rate was $14.20 per hour.

Required:
1. Prepare a report that includes the following:
a. Selling-price variance
b. Sales-volume variance and flexible-budget variance for operating income in the format of the analysis in Exhibit 7- 2
c. Price and efficiency variances for the following:
? Direct materials: frames
? Direct materials: lenses
? Direct manufacturing labor
2. Give three possible explanations for each of the three price and efficiency variances at Ultra in requirement 1c.

1a. Actual selling price = $79.00
Budgeted selling price = $78.00
Actual sales volume = 7,300 units
Selling price variance = (Actual sales price ? Budgeted sales price) × Actual sales volume
= ($79 ? $78) × 7,300 = $7,300 Favorable

1b. Development of Flexible Budget

Budgeted Unit
Amounts Actual Volume Flexible Budget
Amount
Revenues $78.00 7,300 $569,400
Variable costs
DM?Frames $2.30/oz. × 2.00 oz. 4.60a 7,300 33,580
DM?Lenses $3.10/oz. × 4.00 oz. 12.40b 7,300 90,520
Direct manuf. labor $18.00/hr. × 1.00 hrs. 18.00c 7,300 131,400
Total variable manufacturing costs 255,500
Fixed manufacturing costs 114,000
Total manufacturing costs 369,500
Gross margin $199,900

a$35,880 ÷ 7,800 units; b$96,720 ÷ 7,800 units; c$140,400 ÷ 7,800 units

Actual
Results
(1) Flexible-
Budget
Variances
(2) = (1) – (3)
Flexible
Budget
(3) Sales -
Volume
Variance
(4) = (3) – (5)
Static
Budget
(5)
Units sold 7,300 7,300 7,800

Revenues $576,700 $ 7,300 F $569,400 $ 39,000 U $608,400
Variable costs
DM?Frames 70,800 36,500 U 33,580 2,300 F 35,880
DM?Lenses 131,400 40,880 U 90,520 6,200 F 96,720
Direct manuf. labor 145,124 13,724 U 131,400 9,000 F 140,400
Total variable costs 346,604 91,104 U 255,500 17,500 F 273,000
Fixed manuf. Costs 111,000 3,000 F 114,000 0 114,000
Total costs 457,604 88,104 U 369,500 17,500 F 387,000
Gross margin $ 119,096 $80,804 U $199,900 $ 21,500 U $221,400

Level 2 $80,804 U $ 21,500 U
Flexible-budget variance Sales-volume variance

Level 1 $102,304 U
Static-budget variance
1c. Price and Efficiency Variances

DM?Frames?Actual ounces used = 4.00 per unit × 7,300 units = 29,200 oz.
Price per oz. = $70,080 29,200 = $2.40
DM?Lenses?Actual ounces used = 6.00 per unit × 7,300 units = 43,800 oz.
Price per oz. = $131,400 43,800 = $3.00
Direct Labor?Actual labor hours = $145,124 14.20 = 10,220 hours
Labor hours per unit = 10,220 7,300 units = 1.40 hours per unit

Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)

Actual Input Qty.
× Budgeted Price
(2) Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(3)
Direct
Materials:
Frames (7,300 × 4× $2.40)
$70,080 (7,300 × 4 × $2.30)
$67,160 (7,300 × 2.00 × $2.30)
$33,580

$2,920 U $33,580 U
Price variance Efficiency variance

Direct
Materials:
Lenses (7,300 × 6.0 × $3.00)
$131,400 (7,300 × 6.0 × $3.10)
$135,780 (7,300 × 4.00 × $3.10)
$90,520

$4,380 F $45,260 U
Price variance Efficiency variance

Direct
Manuf.
Labor (7,300 × 1.40 × $14.20)
$145,124 (7,300× 1.40 × $18.00)
$183,960 (7,300 × 1.00 × $18.00)
$131,400

$38,836 F $52,560 U
Price variance Efficiency variance

2. Possible explanations for the price variances are
(a) unexpected outcomes from purchasing and labor negotiations during the year.
(b) higher quality of frames and/or lower quality of lenses purchased.
(c) standards set incorrectly at the start of the year.

Possible explanations for the uniformly unfavorable efficiency variances are
(a) substantially higher usage of lenses due to poor-quality lenses purchased at lower price.
(b) lesser trained workers hired at lower rates result in higher materials usage (for both frames and lenses), as well as lower levels of labor efficiency.
(c) standards set incorrectly at the start of the year.