Deluxe LinensDeluxe Linens makes high-end sheets which they sell to major retail stores and on their website. The budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. The production manager was pleased when she reviewed the following data:

1. Prepare a report that provides a more detailed explanation of why the master budget was not achieved. Deluxe produced 6,800 units in the period.

2. Calculate the direct cost usage and price variances for material and labor.3. Interpret the direct cost usage and price variances. Explain each one individually

and as a collective.

Master Budget Actual Costs Variance

Direct materials $104,000 $96,900 $7,100 F

Direct labor 40,000 37,740 2,260 F

Deluxe LinensDeluxe Linens makes high-end sheets which they sell to major retail stores and on their website. The budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. The production manager was pleased when she reviewed the following data:

1. Prepare a report that provides a more detailed explanation of why the master budget was not achieved. Deluxe produced 6,800 units in the period.

To understand why the master budget was not achieved, a flexible budget needs to be constructed based on the actual number of units produced. See the next slide to see the flexible budget, the flexible budget variances and the interpretations.

Master Budget Actual Costs Variance

Direct materials $104,000 $96,900 $7,100 F

Direct labor 40,000 37,740 2,260 F

Deluxe Linens

Master Budget

Standard cost per

unitFlexible Budget

Actual Results

Flexible Budget

VarianceVolume 8,000* 6,800 6,800 0

Direct materials $104,000 $13 $88,400 $96,900 $8,500 UDirect labor 40,000 5 34,000 37,740 3,740 U

Total costs $144,000 $122,400 $134,640 $12,240 U

The manager should have expected lower variable costs when volume was 15% less than budgeted in the master budget. But the manager was unable to bring the costs below the amounts in the flexible budget. Costs of $21,600 (1,200 x $18) were saved by producing 1,200 fewer units than planned; however, the manager spent $12,240 (10%) more than expected (based on the standards) to produce 6,800 units.

* 8,000 units = $104,000/$13 = $40,000/$5

Deluxe LinensDeluxe Linens makes high-end sheets which they sell to major retail stores and on their website. The budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. The production manager was pleased when she reviewed the following data:

In addition, Deluxe Linens purchased and used 12,920 yards of material. Further, their production labor worked a total of 2,040 hours. Deluxe Linens expected to use 2 yards of material and .25 hours of direct labor to produce each sheet.

1. Calculate the direct cost usage and price variances for material and labor.

Master Budget Actual Costs

Direct materials $104,000 $96,900

Direct labor 40,000 37,740

Deluxe LinensDeluxe Linens makes high-end sheets which they sell to major retail stores and on their website. The budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. The production manager was pleased when she reviewed the following data:

In addition, Deluxe Linens purchased and used 12,920 yards of material. Further, their production labor worked a total of 2,040 hours and they produced 6800 sheets. Deluxe Linens expected to use 2 yards of material and .25 hours of direct labor to produce each sheet.

1. Calculate the direct cost usage and price variances for material and labor.See the next five slides for the calculations.

Master Budget Actual Costs

Direct materials $104,000 $96,900

Direct labor 40,000 37,740

Deluxe LinensThe budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. In addition, Deluxe Linens purchased and used 12,920 yards of material for which they paid $96,900. Further, their production labor worked a total of 2,040 hours and were paid $37,740; they produced 6800 sheets. Deluxe Linens expected to use 2 yards of material and .25 hours of direct labor to produce each sheet.

MaterialSP =

AP =

SQa =

AQ =

Deluxe LinensThe budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. In addition, Deluxe Linens purchased and used 12,920 yards of material for which they paid $96,900. Further, their production labor worked a total of 2,040 hours and were paid $37,740; they produced 6800 sheets. Deluxe Linens expected to use 2 yards of material and .25 hours of direct labor to produce each sheet.

MaterialSP = $13/2 yards = $6.50 per yard

AP = $96,900/12,920 yards = $7.50 per yard

SQa = 2 yards per sheet X 6800 sheets = 13,600 yards

AQ = 12,920 yards

Deluxe LinensFormulas for direct cost usage (efficiency) and price (rate) variances:

Price: (SP – AP) x AQUsage: (SQa – AQ) x SP [where SQa= Standard quantity for actual production]

SP = $13/2 yards = $6.50 per yardAP = $96,900/12,920 yards = $7.50 per yardSQa = 2 yards per sheet X 6800 sheets = 13,600 yards

AQ = 12,920 yards

Material Price: (SP – AP) x AQ= [$6.50 - $7.50] x 12,920= $12,920 U

Material Usage: (SQa – AQ) x SP = [13,600 – 12,920] x $6.50

= $4,420 FTotal Direct Material Flexible Budget Variance = $12,920 U + $4,420 F = $8,500 U

Deluxe LinensThe budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. In addition, Deluxe Linens purchased and used 12,920 yards of material for which they paid $96,900. Further, their production labor worked a total of 2,040 hours and were paid $37,740; they produced 6800 sheets. Deluxe Linens expected to use 2 yards of material and .25 hours of direct labor to produce each sheet.

LaborSP = $5/.25 hours = $20 per hour

AP = $37,740/2,040 hours = $18.50 per hour

SQa = .25 hours per sheet X 6800 sheets = 1700 hours

AQ = 2,040 hours

Deluxe Linens

SP = $5/.25 hours = $20 per hourAP = $37,740/2,040 hours = $18.50 per hourSQa = .25 hours per sheet X 6800 sheets = 1700 hours

AQ = 2,040 hours

Labor Rate: (SP – AP) x AQ = [$20 - $18.50] x 2,040= $3,060 F

Labor Efficiency:(SQa – AQ) x SP = [1,700 – 2,040] x $20

= $6,800 UTotal Direct LaborFlexible Budget Variance = $3,060 F + $6800 U = $3,740 U

Deluxe LinensDeluxe Linens makes high-end sheets which they sell to major retail stores and on their website. The budgeted costs for materials and direct labor per unit of finished product are $13 and $5, respectively. The production manager was pleased when she reviewed the following data:

3. Interpret the direct cost usage and price variances. Explain each one individually. Create a narrative that combines as many of the individual variances as possible.

Master Budget Actual Costs

Direct materials $104,000 $96,900

Direct labor 40,000 37,740

Deluxe Linens3. 3. Interpret the direct cost usage and price variances. Explain each one individually. Create a narrative that combines as many of the individual variances as possible.Individual Explanations (hypotheses):Direct Material Price: Deluxe Linens purchased higher quality material than suggested by their standard price; prices in the market increased due to increased demand or inflationDirect Material Usage: Deluxe Linens used less material than suggested by the standard because the material was of higher quality; new machines created less scrap (waste)Direct Labor Rate: The labor market became less competitive and so lower rates were paid to workers; Deluxe Linens hired less skilled workersDirect Labor Efficiency: Labor had to learn to use new machines and therefore more required more hours; labor had to learn to use new material and therefore more hours were needed; labor was shirking and therefore used more hours

Deluxe Linens3. 3. Interpret the direct cost usage and price variances. Explain each one individually. Create a narrative that combines as many of the individual variances as possible.Combined Explanations (hypotheses):Deluxe Linens decided to buy higher quality material than indicated by their current standard which resulted in a unfavorable material price variance. The higher quality material worked well in the production process and therefore less material was used than expected which resulted in a favorable material usage variance. Deluxe Linens hired less expensive (less skilled) workers, resulting in a favorable labor rate variance. However, the less skilled workers required more time to produce the output, resulting in an unfavorable labor efficiency variance.