Use of materials and manufacturing labor variances for ...

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Use of materials and manufacturing labor variances for benchmarking.
 
  You are a new junior accountant at In Focus Corporation, maker of lenses for eyeglasses. Your company sells generic-quality lenses for a moderate price. Your boss, the controller, has given you the latest month's report for the lens trade association. This report includes information related to operations for your firm and three of your competitors within the trade association. The report also includes information related to the industry benchmark for each line item in the report. You do not know which firm is which, except that you know you are Firm A.
 
  Required:
  1. Calculate the total variable cost per unit for each firm in the trade association. Compute the percent of total for the material, labor, and variable overhead components.
  2. Using the trade association's industry benchmark, calculate direct materials and direct manufacturing labor price and efficiency variances for the four firms. Calculate the percent over standard for each firm and each variance.
  3. Write a brief memo to your boss outlining the advantages and disadvantages of belonging to this trade association for benchmarking purposes. Include a few ideas to improve productivity that you want your boss to take to the department heads' meeting.

Question 2

If expenses are greater than revenue, the Income Summary account will be closed by a debit to
 a. Cash and a credit to Income Summary.
   b. Income Summary and a credit to Cash.
   c. Capital and a credit to Income Summary.
   d. Income Summary and a credit to Capital.
   e. Income Summary and a credit to Drawing.

[ms_sulzle]

Answer to Question 1

1. Unit variable cost (dollars) and component percentages for each firm:

Firm A Firm B Firm C Firm D

DM 10.75 37.6 10.50 27.3 11.22 44.0 11.70 38.2
DL 10.88 38.1 14.00 36.3 9.26 36.3 10.68 34.9
VOH 6.94 24.3 14.00 36.4 5.04 19.7 8.23 26.9
Total 28.57 100.0 38.50 100.0 25.52 100.0 30.61 100.0

2. Variances and percentage over/under standard for each firm relative to the Industry Benchmark:

Firm A Firm B Firm C Firm D

Variance  over standard
Variance  over standard
Variance  over standard
Variance  over standard
DM Price Variance 0.22 F 1.96 0.30 U 2.94   1.56 F 11.76
DM Efficiency Variance   0.77 F 6.98 0.26 U 2.33 2.30 U 20.93
DL Price Variance 1.50 U 16.00 1.50 U 12.00 1.14 U 14.00 1.93 U 22.00
DL Efficiency Variance 0.63 U 7.14 3.75 U 42.86 0.63 F 7.14  

We illustrate these calculations for Firm A.

The DM Price Variance is computed as:

(Firm A Price  Benchmark Price)  Firm A Usage
= (5.00  5.10)  2.15 oz.
= 0.22 F

The DM Efficiency Variance is computed as follows:

(Firm A Usage  Benchmark Usage)  Benchmark Price
= (2.15 oz.  2.15 oz.)  5.10
= 0

The DL Price Variance is computed as:

(Firm A Rate  Benchmark Rate)  Firm A Hours
= (14.50  12.50)  0.75
= 1.50 U

The DL Efficiency Variance is computed as follows:

(Firm A Usage  Benchmark Usage)  Benchmark Rate
= (0.75 hrs.  0.70 hrs.)  12.50
= 0.63 U

The  over standard is the percentage difference in prices relative to the Industry Benchmark. Again using the DM Price Variance calculation for Firm A, the  over standard is given by:

(Firm A Price  Benchmark Price)/Benchmark Price
= (5.00 - 5.10)/5.10
= 1.96 under standard.

3.

To: Controller
From: Junior Accountant
Re: Benchmarking & productivity improvements
Date: March 15, 2014

Benchmarking advantages
- We can see how productive we are relative to our competition and the industry benchmark.

- We can see the specific areas in which there may be opportunities for us to reduce costs.

Benchmarking disadvantages
- Some of our competitors are targeting the market for high-end and custom-made lenses. I'm not sure that looking at their costs helps with understanding ours better.

- We may focus too much on cost differentials and not enough on differentiating ourselves, maintaining our competitive advantages, and growing our margins.

Areas to discuss
- We may want to find out whether we can get the same lower price for glass as Firm D.

- We may want to re-evaluate the training our employees receive given our level of unfavorable labor efficiency variance compared to the benchmark.

- Can we use Firm B's materials efficiency and Firm C's variable overhead consumption levels as our standards for the coming year?

- It is unclear why the trade association is still using 12.50 for the labor rate benchmark. Given the difficulty of hiring qualified workers, real wage rates are now substantially higher. We pay our workers 2 more per hour, and at least one of our competitors pays even higher wages than we do Firm B does pay 0.50 less than we do per hour and that may be worth looking into.

Answer to Question 2

c

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Thank you

[ms_sulzle]

Happy to help you