# Analysis of Unfavourable Income Variance by ClassOf1

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Sub: Finance                                                                Topic: Managerial Accounting

Question:

Analysis of Unfavourable Income Variance

The Markley Division of Rosette Industries manufactures and sells patio chairs. The chairs are
manufactured in two versions: a metal model and a plastic model of a lesser quality. The company
uses its own sales force to sell the chairs to retail stores and to catalog outlets. Generally, customers
purchase both the metal and plastic versions.

The chairs are manufactured on two different assembly lines located in ad-joining buildings. The
division management and sales department occupy the third building on the property. The division
management includes a division controller responsible for the divisional financial activities and the
preparation of reports explaining the differences between actual and budgeted performance. The
controller structures these reports such that the sales activities are distinguished from cost factors
so that each can be analyzed separately.

The operating results for the first three months of the fiscal year as compared to the budget are
presented in Table I. The budget for the current year was based upon the assumption that Markley
Division would maintain its present market share of the estimated total patio chair market (plastic
and metal combined). A status report had been sent to corporate management toward the end of
the second month indicating that divisional operating income for the first quarter would probably
be about 45 percent below budget; this estimate was just about on target. The division's operating
income was below budget even though industry volume for patio chairs increased by 10 percent
more than was expected at the lime the budget was developed. (see Table 1)

During the quarter, the Markley Division manufactured 55.000 plastic chairs and 22.500 metal
chairs. The costs incurred by each assembly line is also presented as Table 2.

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Sub: Finance                                                                Topic: Managerial Accounting
The standard variable manufacturing costs per unit and the budgeted monthly fixed manufacturing
costs established for the current year are presented below.

TABLE 1 Markley Division Operating Results for the First Quarter

Favorable
(unfavorable)
relative to the
Actual             Budget             budget
Sale in units
Plastic model                                                        60,000            50,000          10,000
Metal model                                                          20,000            25,000          (5,000)
Sales revenue
Plastic model                                                        5630,000          \$500,000        \$130,000
Metal model                                                          300,000           375,000         (75,000)
Total sales                                                        5930,000          \$875,000        \$ 55,000
Less variable costs
Manufacturing (at standard)
Plastic model                                                      §480,000          \$400,000        \$(80,000)
Metal model                                                        -200,000          250,000         50,000
Selling
Commissions                                                        46,500            43,750          (2,750)
Bad debt allowance                                                 9,300             8,750           (550)
Total variable costs (except variable
manufacturing variances)                                        \$735,800          5702,500        \$(33,300)
Contribution margin (except variable
manufacturing variances)                                        \$194,200          \$172,500        \$ 21,700
Less other costs
Variable manufacturing costs variances from
standards                                                       \$ 49,600          s_              \$(49,600)
Fixed manufacturing costs                                       49,200            48,000          (1,200)
Fixed selling & admin, costs                                     38,500            36,000          (2,500)
Corporation offices allocation                                   18,500            17,500          (1,000)

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Sub: Finance                                                                Topic: Managerial Accounting
Total other costs                                                 \$155,800         \$101,500        \$(54,300)
Divisional operational income                                     \$ 38,400         \$ 71,000        , \$(32,600)

TABLE 2. Actual Manufacturing Costs

Raw Materials
(stated in
equivalent finished
chairs)                        Quantity                   Price           Plastic Model                Metal Model
Purchases
Plastic                            60,000                    \$5.65           \$339,000
Metal                              30,000                    \$6.00                                        \$180,000
Usage
Plastic                            56.000                    55.00-          280,000
Metal                              23,000                    \$6.00                                        138,000
Direct labor
9,300 hours @ \$6.00 per hour                                                  55,800
5,600 hours @ \$8.00 per hour                                                                               44,800
Variable
Supplies                                                                      43,000                       18,000
Power                                                                      50,000                       15,000
Employee benefits                                                          19,000                       12,000
Fixed
Supervision                                                                   14,000                       11,000
Depreciation                                                                  12,000                       9,000
Property taxes and other items                                                1,900                        1,300

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