Chapter 9 Solutions: 9-2caudill/Chapter 9 and 10 Example Problems.pdf · 3. Fixed overhead...

Chapter 9 Solutions: 9-2

1.  SQ = 2.5 lbs. × 120,000 = 300,000 pounds

2. SH = 0.6 hr. × 120,000 = 72,000 hours

1. MPV = (AP – SP)AQ MPV = ($0.045 – $0.040)570,000 = $2,850 U

MUV = (AQ – SQ)SP MUV = (570,000 – 550,000)$0.040 = $800 U

AP × AQ SP × AQ SP × SQ $0.045 × 570,000 $0.040 × 570,000 $0.040 × 550,000

$2,850 U $800 U Price Variance Usage Variance

2. LRV = (AR – SR)AH LRV = ($2.55 – $2.60)5,200 = $260 F

LEV = (AH – SH)SR LEV = (5,200 – 5,000)$2.60 = $520 U

AR × AH SR × AH SR × SH $2.55 × 5,200 $2.60 × 5,200 $2.60 × 5,000

$260 F $520 U Rate Variance Efficiency Variance

3. Materials ........................................................... 22,800 Direct Materials Price Variance.................. 2,850 Accounts Payable.................................... 25,650

Work in Process ............................................. 22,000 Direct Materials Usage Variance................ 800 Materials ..................................................... 22,800

Work in Process ............................................. 13,000 Direct Labor Efficiency Variance ............... 520 Direct Labor Rate Variance ................... 260 Wages Payable......................................... 13,260



1. MPV = (AP – SP)AQ MPV = ($2.90 – $3.00)78,200 = $7,820 F

MUV = (AQ – SQ)SP MUV = (78,200 – 75,000)$3.00 = $9,600 U

AP × AQ SP × AQ SP × SQ $2.90 × 78,200 $3.00 × 78,200 $3.00 × 75,000 $7,820 F $9,600 U Price Variance Usage Variance


2. LRV = (AR – SR)AH LRV = ($5.20 – $5.00)90,000 = $18,000 U

LEV = (AH – SH)SR LEV = (90,000 – 87,500)$5.00 = $12,500 U

AR × AH SR × AH SR × SH $5.20 × 90,000 $5.00 × 90,000 $5.00 × 87,500 $18,000 U $12,500 U Rate Variance Efficiency Variance


3. Materials ........................................................... 234,600 Direct Materials Price Variance............ 7,820 Accounts Payable.................................... 226,780

Work in Process............................................. 225,000 Direct Materials Usage Variance ............... 9,600 Materials ..................................................... 234,600

Work in Process............................................. 437,500 Direct Labor Efficiency Variance............... 12,500 Direct Labor Rate Variance ......................... 18,000 Wages Payable......................................... 468,000


1. Cases needing investigation: Week 2: Exceeds the 10% rule. Week 4: Exceeds the $16,000 rule and the 10% rule. Week 5: Exceeds the 10% rule. 2. The purchasing agent. Corrective action would require a return to the

purchase of the higher-quality direct materials normally used. 3. Production engineering is responsible. If the relationship is expected to

persist, then the new direct labor method should be abandoned. If the favorable variance were larger and this is expected to persist, then the new direct labor method should be kept and the standards revised to reflect the new circumstances.


1. Direct Materials: $15 × 4,000 = $60,000 Direct Labor: $12 × 4,000 = $48,000 2. Actual Cost Budgeted Cost Variance

Leather $61,752 $60,000 $1,752 U Direct Labor 52,500 48,000 4,500 U

3. MPV = (AP – SP)AQ MPV = ($4.98 – $5.00)12,400 = $248 F

MUV = (AQ – SQ)SP MUV = (12,400 – 12,000)$5.00 = $2,000 U

AP × AQ SP × AQ SP × SQ $4.98 × 12,400 $5.00 × 12,400 $5.00 × 12,000

$61,752 $62,000 $60,000 $248 F $2,000 U Price Variance Usage Variance

Materials ............................................... 62,000 MPV ................................................. 248 Accounts Payable........................ 61,752

Work in Process................................. 60,000 MUV ....................................................... 2,000 Materials ......................................... 62,000


4. LRV = (AR – SR)AH LRV = ($6.25 – $6.00)8,400 = $2,100 U

LEV = (AH – SH)SR LEV = (8,400 – 8,000)$6.00 = $2,400 U

AR × AH SR × AH SR × SH $6.25 × 8,400 $6.00 × 8,400 $6.00 × 8,000

$52,500 $50,400 $48,000 $2,100 U $2,400 U Rate Variance Efficiency Variance

Work in Process ................................. 48,000 LRV ........................................................ 2,100 LEV......................................................... 2,400 Wages Payable............................. 52,500


1. MPV = (AP – SP)AQ MPV = ($1.50 – $1.60)744,000 = $74,400 F

2. LRV = (AR – SR)AH LRV = ($17.90 – $18.00)56,000 = $5,600 F

LEV = (AH – SH)SR LEV = (56,000 – 52,500*)$18.00 = $63,000 U

*SH = 0.75 × 70,000.

AR × AH SR × AH SR × SH $17.90 × 56,000 $18.00 × 56,000 $18.00 × 52,500

$1,002,400 $1,008,000 $945,000 $5,600 F $63,000 U Rate Variance Efficiency Variance


3. Fixed overhead analysis:

Budgeted FOH Applied FOH Actual FOH $4.00 × 54,000 $4.00 × 52,500

$214,000 $216,000 $210,000 $2,000 F $6,000 U Spending Volume

Note: Practical volume in hours = 0.75 × 72,000 = 54,000 hours. The use of practical volume implies that the volume variance is a measure of unused capacity.

4. Variable overhead analysis:

Budgeted VOH Applied VOH Actual VOH $3.00 × 56,000 $3.00 × 52,500

$175,400 $168,000 $157,500 $7,400 U $10,500 U Spending Efficiency

Spending Variance = (AVOR – SVOR) AH where AVOR = AVOH/AH Efficiency Variance = (AH – SH) SVOR

4. LRV = (AR – SR)AH LRV = ($6.25 – $6.00)8,400 = $2,100 U

LEV = (AH – SH)SR LEV = (8,400 – 8,000)$6.00 = $2,400 U

AR × AH SR × AH SR × SH $6.25 × 8,400 $6.00 × 8,400 $6.00 × 8,000

$52,500 $50,400 $48,000 $2,100 U $2,400 U Rate Variance Efficiency Variance

Work in Process ................................. 48,000 LRV ........................................................ 2,100 LEV......................................................... 2,400 Wages Payable............................. 52,500 Wages Payable ................................................ 1,002,400

d. WIP........................................................................... 367,500 Variable Overhead Control ........................... 157,500 Fixed Overhead Control ................................ 210,000

e. Variable Overhead Control................................ 175,400 Fixed Overhead Control..................................... 214,000 Miscellaneous Accounts ............................... 389,400

f. Closing direct materials and direct labor variances:

Cost of Goods Sold................................................... 40,600 MPV .............................................................................. 74,400 LRV .............................................................................. 5,600 MUV........................................................................... 57,600 LEV............................................................................ 63,000 Overhead: Fixed Overhead Volume Variance......................... 6,000 Variable Overhead Spending Variance................ 7,400 Variable Overhead Efficiency Variance ............... 10,500



1. Whirlmore, Inc. Income Statement (in thousands)

For the Year 20XX

Home-Supreme Apartment International Total Sales ................................... $ 2,700 $ 2,400 $1,300 $ 6,400 COGS.................................. 1,770 1,870 1,040 4,680 Gross profit................... $ 930 $ 530 $ 260 $ 1,720 Selling and admin. expense 640 180 100 920 Division profit ............... $ 290 $ 350 $ 160 $ 800 Income taxes (30%) ........... 87 105 48 240 After-tax income........... $ 203 $ 245 $ 112 $ 560 2. After-Tax Weighted Percent Cost Cost

Common stock................................. 0.80 0.110 0.0880 Bonds ............................................... 0.20 0.056* 0.0112 Weighted average cost of capital...................................................... 0.0992

*0.08(1 – 0.3) = 0.056.


3. Home-Supreme Apartment International Total After-tax income ............. $ 203,000 $ 245,000 $ 112,000 $560,000 Less cost of capital: (0.0992 × $2,100,000) 208,320 (0.0992 × $500,000) .. 49,600 (0.0992 × $400,000) .. 39,680 297,600 EVA .................................. $ (5,320) $ 195,400 $ 72,320 $262,400

4. While EVA is positive for Whirlmore, Inc., as a whole, it is negative for the Home-Supreme Division. Therefore, even though the Home-Supreme Division has positive net income, it needs to increase net income or reduce the capital used to generate positive economic value added.

ROI=Op Income/Assets = Margin x Turnover Margin = Op Income/Sales Turnover = Sales / Assets


1. A B C D Revenue.............. $10,000 $48,000 $96,000 $19,200* Expenses............ $8,000 $36,000* $90,000 $18,000* Net Income ......... $2,000 $12,000 $6,000* $1,200* Assets................. $40,000 $96,000* $48,000 $9,600 Margin................. 20%* 25% 6.25%* 6.25% Turnover ............. 0.25* 0.50 2* 2 ROI ...................... 5%* 12.5%* 12.5%* 12.5%* *Indicates calculated amounts. 2. A’s residual income = $2,000 – (0.09 × $40,000) = ($1,600) B’s residual income = $12,000 – (0.09 × $96,000) = $3,360 C’s residual income = $6,000 – (0.09 × $48,000) = $1,680 D’s residual income = $1,200 – (0.09 × $9,600) = $336

2.

3.

Chapter 10 Solutions: 10-21 1. Fred turned down the proposed investment as the ROI from the investment is

13% ($156,000/$1,200,000) compared to the current ROI of 16% ($2,560,000/$16,000,000). If the iron is produced, then the division’s ROI would decrease to 15.79% ($2,716,000/$17,200,000).

2. The iron should have been manufactured since the company’s income would

increase $48,000 [$156,000 – (9% × $1,200,000)]. 3. Yes. The project has a residual income of $48,000 and accepting it would

have increased the division’s residual income. 4. Residual income encourages managers to invest in projects that increase a

firm’s income, decreasing the likelihood that profitable investments will be turned down. ROI encourages managers to select those investments that provide the greatest return per dollar invested. ROI provides a relative measure of performance, making comparisons among divisions possible.

5. Since ROI is the main performance measure, Fred was not willing to accept a

profitable investment because it would decrease his division’s ROI. Facing a possible promotion, he chose to maintain the division’s high ROI rather than earn extra profits for the company. The decision was motivated by self-interest. Some may argue that the decision was encouraged by the company’s reward system. This argument, however, is weak since it is virtually certain that the intent of higher management is to reward productive behavior, not manipulative behavior. From this perspective, the decision was wrong and, thus, unethical.

However, Fred might argue that the true objective of the firm is to encourage and reward high return on investment. He may be able to develop an acceptably high ROI project in the next eight to 10 months. Thus, not accepting the immediate project may give him the ability to invest in a more profitable project later on.

Corporate Profiles

Next Week Major US Beverage Companies and Fast Food Chains

•  The Coca-Cola Company •  PepsiCo •  McDonald’s •  Burger King

Corporate Profiles

Major Oil and Gas Companies from Around the World

•  Total (France) •  Chevron (US) •  British Petroleum (UK) •  Petrobras (Brazil)

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