Assignment: Totoa Variance Case
Instructions
Students can work by themselves or in teams of up to four persons, all from the same class. Students should not discuss the case with anyone except their teammates (if any). If you choose to work alone, you should not ask others for help. The solution to all questions must be typed. If you work in teams, hand in only one copy of the solution with each team member's name listed alphabetically.
Totoa Variance Case
Totoa Inc. manufactures a single product, Wingit. Totoa uses budgets and standards in its planning and control functions. Totoa makes use of its standards in order to derive their budgeted cost per unit. For example, Exhibit A provides information on the budgeted variable costs per unit. When determining direct material costs for the planning (master) budget income statement, the $11.48 budgeted material cost per unit of Wingit would be used in the calculation.
Exhibit A
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Budgeted (Standard) Variable Costs Per Unit of Wingit
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Raw material: 4.1 pounds at $2.80 per pound
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$11.48
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Direct labor: 1.2 direct labor hours at $24.00 per hour
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28.80
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Variable overhead: 1.2 direct labor hours at $10.80 per hour
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12.96
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Total variable budgeted (standard) cost per Wingit
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$53.24
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The standards for fixed manufacturing overhead costs are: 1.2 direct labor hours at $14.00 per hour. The standard fixed manufacturing overhead rate per hour is calculated based on a denominator level of activity of 45,000 direct labor hours.
The planning budget income statement is based on the expectation of selling 38,000 units of Wingit. The budgeted sales price is $76.00 per unit, and total budgeted fixed selling and administrative costs are $186,500. There are no variable selling and administrative costs in this firm.
The company actually produced and sold 36,000 units this year. The company never has a beginning or ending finished goods inventory. Everything produced in the year is sold in that same year.
The actual income statement for the year is provided in Exhibit B.
Exhibit B
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Totoa Inc.
Actual Income Statement
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Sales:
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36,000 units at $78.00
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$2,808,000
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Less Variable Costs:
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Direct materials
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436,500
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Direct labor
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1,040,250
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Variable manufacturing overhead
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482,000
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Contribution margin
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849,250
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Less Fixed Costs:
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Fixed manufacturing overhead costs
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625,400
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Fixed selling and administrative costs
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175,000
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Net operating income
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$ 48,850
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Actual production data and actual costs for the year are given in Exhibit C.
Exhibit C
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Direct materials purchased and used:
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150,000 pounds at $2.91 per pound
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Direct labor:
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43,800 direct labor hours at $23.75/hr.
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Variable overhead costs:
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$482,000
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Fixed overhead costs:
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$625,400
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Production
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36,000 units
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Required: The solution to this case must be typed.
1. Prepare a detailed income statement variance analysis using the contribution approach income statement (i.e., variable costing basis) for the year (i.e., compare the actual income statement with the flexible budget income statement and compare the flexible budget income statement with the planning budget income statement). Show all the activity, revenue, and spending variances appearing in the income statement analysis. A template for answering this question is given below. All variances should be marked with either an "F" for favorable or "U" for unfavorable.
Totoa Variance Case Solution Template for Part 1
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Actual
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Revenue & Spending
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Flexible
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Activity
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Master
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Results
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Variances
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Budget
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Variances
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Budget
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Sales
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$$$
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$$$
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$$$
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$$$
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$$$
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Less V.C.
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DM
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$$$
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$$$
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$$$
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$$$
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$$$
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DL
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$$$
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$$$
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$$$
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$$$
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$$$
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V-OH
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$$$
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$$$
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$$$
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$$$
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$$$
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CM
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$$$
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$$$
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$$$
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$$$
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$$$
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Less FC
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Manufacturing
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$$$
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$$$
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$$$
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$$$
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$$$
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Sell & Admin
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$$$
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$$$
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$$$
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$$$
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$$$
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NOI
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$$$
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$$$
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$$$
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$$$
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$$$
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2. Prepare a very detailed manufacturing cost variance analysis (e.g., calculate the material price variance and quantity variance; the labor rate variance and efficiency variance; the variable overhead rate variance and efficiency variance; and the fixed manufacturing overhead budget variance and volume variance). All variances should be marked with either an "F" for favorable or "U" for unfavorable. Show your calculations.