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Morse Variance Case

ACBU 2223

Spring 2020

Instructions for Students

Students should work in teams of up to 3 members.  Students should not discuss the case with anyone except their teammates.  The solution to all questions must be typed and submitted to the link available on the Blackboard website by the end of Due date.  A team is to upload only one copy of the solution with each member’s name listed alphabetically.  Calculations should be rounded off to two decimal points if necessary.

Morse Variance Case

Morse Inc. manufactures a single product, LWL.  Morse uses budgets and standards in its planning and control functions.  Morse makes use of its standards in order to derive their budgeted costs per unit.  For example, Exhibit A provides information on the budgeted costs per unit.  When determining direct material costs for the planning budget income statement, the $9 budgeted direct material cost per unit of LWL would be used in the calculation.

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The budgeted (standard) fixed manufacturing overhead cost per hour is calculated based on a denominator level of activity of 100,000 direct labor hours.

The planning budget income statement is based on the expectation of selling 500,000 units of LWL.  The budgeted sales price is $30 per unit, and total budgeted fixed selling and administrative costs are $2,500,000.  There are no variable selling and administrative costs in this firm.

The company actually produced and sold 470,000 units this year.  The company never has a beginning or ending raw materials inventory, because it uses all raw materials purchased.  Also, 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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Morse Inc.

Actual Income Statement

Required:

1.      Could you explain to your boss why the company should use the flexible budget income statement in the variance analysis?  Your explanation should not be more than 1/2 page double spaced with a 12 font size. (15 points)

2.      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 revenue, spending, and activity 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. (35 points)

Morse Variance Case Solution Template for Part 1

3.      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. (40 points)

4.      Could you reconcile spending variances in Part 2 with manufacturing cost variances in Part 3?  For example, how is the amount of spending variance for direct materials in Part 2 explained by the amounts of direct material variances in Part 3?  Excluding your quantitative analysis if any, your explanation should not be more than 1/3 page double spaced with a 12 font size. (10 points)