Price and efficiency variances. Peterson Foods manufactures ...

[melina_rosy]

Price and efficiency variances.
 
  Peterson Foods manufactures pumpkin scones. For January 2014, it budgeted to purchase and use 15,000 pounds of pumpkin at 0.89 a pound. Actual purchases and usage for January 2014 were 16,000 pounds at 0.82 a pound. Peterson budgeted for 60,000 pumpkin scones. Actual output was 60,800 pumpkin scones.
 
  Required:
  1. Compute the flexible-budget variance.
  2. Compute the price and efficiency variances.
  3. Comment on the results for requirements 1 and 2 and provide a possible explanation for them.

Question 2

Miller Co has a net loss for the year, the net loss would be recorded
 a. on the credit side of the balance sheet columns of the work sheet.
  b. on the debit side of the balance sheet columns of the work sheet.
  c. on the debit side of the income statement columns of the work sheet.
  d. none of the answers listed.

[ricroger]

Answer to Question 1

1. The key information items are:
Actual Budgeted
Output units (scones)
Input units (pounds of pumpkin)
Cost per input unit 60,800
16,000
 0.82 60,000
15,000
 0.89

Peterson budgets to obtain four pumpkin scones from each pound of pumpkin.
The flexible-budget variance is 408 F.

Actual
Results
(1) Flexible-
Budget
Variance
(2) = (1)  (3)
Flexible
Budget
(3)
Sales-Volume Variance
(4) = (3)  (5)
Static
Budget
(5)
Pumpkin costs 13,120a 408 F 13,528b 178 U 13,350c

a 16,000  0.82 = 13,120
b 60,800  0.25  0.89 = 13,528
c 60,000  0.25  0.89 = 13,350

2.
Actual Costs
Incurred
(Actual Input Qty.
 Actual Price)

Actual Input Qty.
 Budgeted Price Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
 Budgeted Price)
13,120a 14,240b 13,528c

1,120 F 712 U
Price variance Efficiency variance
408 F
Flexible-budget variance
a 16,000  0.82 = 13,120
b16,000  0.89 = 14,240
c 60,800  0.25  0.89 = 13,528

3. The favorable flexible-budget variance of 408 has two offsetting components:
(a) favorable price variance of 1,120reflects the 0.82 actual purchase cost being lower than the 0.89 budgeted purchase cost per pound.
(b) unfavorable efficiency variance of 712reflects the actual materials yield of 3.80 scones per pound of pumpkin (60,800  16,000 = 3.80) being less than the budgeted yield of 4.00 (60,000  15,000 = 4.00). The company used more pumpkins (materials) to make the scones than was budgeted.

One explanation may be that Peterson purchased lower quality pumpkins at a lower cost per pound.

Answer to Question 2

B