Comprehensive variance analysis review

Vivus Bioscience produces a generic statin pill that is used to treat patients with high cholesterol. The pills are sold in blister packs of 10. Vivus employs a team of sales representatives who are paid varying amounts of commission.
Given the narrow margins in the generic drugs industry, Vivus relies on tight standards and cost controls to manage its operations. Vivus has the following budgeted standards for the month of April 2014:

Vivus budgeted sales of 1,400,000 packs for April. At the end of the month, the controller revealed that actual results for April had deviated from the budget in several ways:

? Unit sales and production were 90% of plan.
? Actual average selling price increased to $7.30.
? Productivity dropped to 250 packs per hour.
? Actual direct manufacturing labor cost was $14.60 per hour.
? Actual total direct material cost per unit increased to $1.90.
? Actual sales commissions were $0.30 per unit.
? Fixed overhead costs were $12,000 above budget.

Calculate the following amounts for Vivus for April 2014:

Required:
1. Static-budget and actual operating income
2. Static-budget variance for operating income
3. Flexible-budget operating income
4. Flexible-budget variance for operating income
5. Sales-volume variance for operating income
6. Price and efficiency variances for direct manufacturing labor
7. Flexible-budget variance for direct manufacturing labor

Actual Results
Units sold (90% × 1,400,000) 1,260,000
Selling price per unit $7.30
Revenues (1,260,000 × $7.30) $9,198,000
Direct materials purchased and used:
Direct materials per unit $1.90
Total direct materials cost (1,260,000 × $1.90) $2,394,000
Direct manufacturing labor:
Actual manufacturing rate per hour $14.60
Labor productivity per hour in units 250
Manufacturing labor-hours of input (1,260,000 ÷ 250) 5,040
Total direct manufacturing labor costs (5,040 × $14.60) $73,584
Direct marketing costs:
Direct marketing cost per unit $0.30
Total direct marketing costs (1,260,000 × $0.30) $378,000
Fixed administrative and overhead costs ($960,000 + $12,000) $972,000
Static Budgeted Amounts
Units sold 1,400,000
Selling price per unit $7.20
Revenues (1,400,000 × $7.20) $10,080,000
Direct materials purchased and used:
Direct materials per unit $1.80
Total direct materials costs (1,400,000 × $1.80) $2,520,000
Direct manufacturing labor:
Direct manufacturing rate per hour $14.40
Labor productivity per hour in units 280
Manufacturing labor-hours of input (1,400,000 ÷ 280) 5,000
Total direct manufacturing labor cost (5,000 × $14.40) $72,000
Direct marketing costs:
Direct marketing cost per unit $0.36
Total direct marketing cost (1,400,000 × $0.36) $504,000
Fixed administrative and overhead costs $960,000

1. Actual Static-Budget
Results Amounts
Revenues $9,198,000 $10,080,000
Variable costs
Direct materials 2,394,000 2,520,000
Direct manufacturing labor 73,584 72,000
Direct marketing costs 378,000 504,000
Total variable costs 2,845,584 3,096,000
Contribution margin 6,352,416 6,984,000
Fixed costs 972,000 960,000
Operating income $5,380,416 $6,024,000

2. Actual operating income $5,380,416
Static-budget operating income 6,024,000
Total static-budget variance $ 643,584 U

Flexible-budget-based variance analysis for Vivus, Inc. for April 2014:

Actual
Results Flexible-Budget
Variances
Flexible
Budget Sales-Volume
Variances
Static
Budget
Units (10-packs) sold 1,260,000 0 1,260,000 140,000 1,400,000

Revenues
Variable costs
Direct materials
Direct manuf. labor
Direct marketing costs
Total variable costs
$9,198,000

2,394,000
73,584
378,000
2,845,584
$126,000 F

126,000 U
8,784 U
75,600 F
59,184 U
$9,072,000

2,268,000
64,800
453,600
2,786,400
$1,008,000 U

252,000 F
7,200 F
50,400 F
309,600 F
$10,800,000

2,520,000
72,000
504,000
3,096,000
Contribution margin 6,352,416 66,816 F 6,285,600 698,400 U 6,984,000
Fixed costs 972,000 12,000 U 960,000 0 960,000
Operating income $5,380,416 $ 54,816 F $5,325,600 $698,400 U $6,024,000

3. Flexible-budget operating income = $5,325,600.
4. Flexible-budget variance for operating income = $54,816 F.
5. Sales-volume variance for operating income = $698,400 U.

Analysis of direct mfg. labor flexible-budget variance for Vivus, Inc. for April 2014:

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

Actual Input Qty.
× Budgeted Price Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
Direct.
Mfg. Labor (5,040 × $14.60)
$73,584 (5,040 × $14.40)
$72,576 (*4,500 × $14.40)
$64,800

$1,008 U $7,776 U
Price variance Efficiency variance

* 1,260,000 units ÷ 280 direct manufacturing labor standard productivity rate per hour.

7. DML price variance = $1,008 U; DML efficiency variance = $7,776 U
8. DML flexible-budget variance = $8,784 U