If the adjustment for accrued wages is omitted, liabilities and ...

[burchfield96]

If the adjustment for accrued wages is omitted, liabilities and expenses will be overstated.
  Indicate whether the statement is true or false

Question 2

Variance analysis, nonmanufacturing setting.
 
  Marcus McQueen has run In-A-Flash Car Detailing for the past 10 years. His static budget and actual results for June 2014 are provided next. Marcus has one employee who has been with him for all 10 years that he has been in business. In addition, at any given time he also employs two other less experienced workers. It usually takes each employee 2 hours to detail a vehicle, regardless of his or her experience. Marcus pays his experienced employee 30 per vehicle and the other two employees 15 per vehicle. There were no wage increases in June.
 
  Required:
  1. How many cars, on average, did Marcus budget for each employee? How many cars did each employee actually detail?
  2. Prepare a flexible budget for June 2014.
  3. Compute the sales price variance and the labor efficiency variance for each labor type.
  4. What information, in addition to that provided in the income statements, would you want Marcus to gather, if you wanted to improve operational efficiency?

[flexer1n1]

Answer to Question 1

F

Answer to Question 2

Note: Some print versions of the text refer to the Image line of sunglasses managed by John Puckett. The name of the line should be Delta and the manager's name is John Barton.
1. This is a problem of two equations and two unknowns. The two equations relate to the number of cars detailed and the labor costs (the wages paid to the employees).
X = number of cars detailed by the experienced employee
Y = number of cars detailed by the less experienced employees (combined)

Budget: X + Y = 280 Actual: X + Y = 320
30X + 15Y = 6,720 30X + 15Y = 8,400

Substitution: Substitution:
30X + 15(280  X) = 6,720 30X + 15(320  X) = 8,400
15X = 2,520 15X = 3,600
X= 168 cars X = 240 cars
Y=112 cars Y= 80 cars

Budget: The experienced employee is budgeted to detail 168 cars (and earn 5,040), and the less experienced employees are budgeted to detail 56 cars each and earn 840 apiece.

Actual: The experienced employee details 240 cars (and grosses 7,200 for the month), and the other two wash 40 each and gross 600 apiece.

2.

Actual
Results
(1) Flexible-
Budget
Variances
(2) = (1)  (3)
Flexible
Budget
(3) Sales -
Volume
Variance
(4) = (3)  (5)
Static
Budget
(5)
Units sold 320 320 280

Revenues 72,000  11,200 F 60,800a  7,600 F  53,200
Variable costs
Supplies 1,360 80 F 1,440b 180 U 1,260
Labor  Experienced 7,200 1,440 U 5,760c 720 U 5,040
Labor  Less experienced 1,200 720 F 1,920d 240 U 1,680
Total variable costs 9,760 640 U 9,120 1,140 U 7,980
Contribution Margin 62,240 10,560 F 51,680 6,460 F 45,220
Fixed costs 9,800 0 9,800 0 9,800
Operating income 52,440  10,560 F 41,880  6,460 F 35,240

a 320  (53,200/280)
b 320  (1,260/280)
c 320  (5,040/280)
d 320  (1,680/280)
3. Actual sales price = 72,000  320 = 225

Sales Price Variance
= (Actual sales price  Budgeted sales price)  Actual number of cars detailed:
= (225  190)  320
= 11,200 Favorable

Labor efficiency for experienced worker:
Standard cars expected to be completed by experienced worker based on actual number of cars detailed = (168  280)  320 = 192 cars
Labor efficiency variance = Budgeted wage rate per car  (Actual cars detailed  budgeted cars detailed)
= 30  (240  192)
= 1,440 Unfavorable

Labor efficiency for less-experienced workers:
Standard cars expected to be completed by less-experienced workers based on actual number of cars detailed = (112  280)  320 = 128 cars
Labor efficiency variance = Budgeted wage rate per car  (Actual cars detailed  budgeted cars detailed)
= 15  (80  128)
= 720 Favorable

4. In addition to understanding the variances computed above, Marcus should attempt to keep track of the number of cars worked on by each employee, as well as the number of hours actually spent on each car. In addition, Marcus should look at the prices charged for detailing, in relation to the hours spent on each job. It should also be considered whether the experienced worker should be asked to take less time per car, given his prior years at work and the fact that he is paid twice the wage rate of the less-experienced employees.