Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 61

Sales and Variable Cost Variances; Current to Prior Year; Review of Chapter 14 RJM Enterprises is a manufacturer of consumer electronics products. The industry is very competitive and RJM has seen its profits fall in recent years, including an operating loss of $18,585 in 2009. RJM was able to turn that around in 2010 by aggressively cutting costs. The summarized financial results for RJM are shown below.

	2010	2009
Gross sales:	$934,920	$1,273,545
Less variable costs
Materials	$550,368	$ 746,200
Labor	329,280	511,875
Total contribution margin	$ 55,272	$ 15,470
Fixed costs	33,509	34,055
Operating income	$ 21,763	$ (18,585)

Jim Green, the management accountant at RJM, is analyzing the company’s performance for 2010, in order explain to management the specific aspects that drove the company to success. Some of the information Jim obtained is:

	2010	2009
Sales units	39,200	45,500
Price	$23.85	$27.99
Materials cost per unit of material	$ 7.80	$ 8.20
Materials required/unit	1.80	2.00
Labor required/unit	0.60	0.75
Wage rate ($/hour)	$14.00	$15.00

Assume that RJM, for efficiency and to reduce cost, maintains little or no materials or work in process inventory.

Required

1. Determine the selling price variance for 2010 based on sales dollars. Determine the volume variance based on contribution margin.

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2. Determine the variable cost variances:

a. The usage and price variances for materials.

b. The usage and rate variances for labor.

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3. Interpret your findings in parts 1 and 2 above.

Step 1 of 6

Budget and variance:

Budget is a statement prepared by the management of the business entity which helps them to estimate the expenses, income, receipts, payment, sales and purchases during the period. It is prepared keeping in mind the companies objectives and abilities with respect to resources they have. Often businesses deviate from their budgeted figures either in favourable way or unfavourable way. Such deviations are commonly referred to as variances.