Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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| Solution Exhibit B Columnar presentation of direct service labour yield and mix variances for O’Connell & Associates (Actual total quantity of all inputs used × Actual input mix) × Budgeted prices (1) (Actual total quantity of all inputs used × Budgeted input mix) × Budgeted Prices (2) Flexible budget (Budgeted total quantity of all inputs allowed for actual output achieved × Budgeted input mix) × Budgeted prices (3) Principal-hours 5,900 × 0.05 × €105 = €30,975 5,900 × 0.10 × €105 = €61,950 6,000 × 0.10 × €105 = €63,000 Senior-hours 5,900 × 0.40 × € 75 = 177,000 5,900 × 0.30 × € 75 = 132,750 6,000 × 0.30 × € 75 = 135,000 Junior-hours 5,900 × 0.55 × € 25 = 81,125 5,900 × 0.60 × € 25 = 88,500 6,000 × 0.60 × € 25 = 90,000 €289,100 €283,200 €288,000 ↑ €5,900 U F Total mix variance Total yield variance ↑ €1,100 U ↑ Total efficiency variance Note that F = favourable effect on operating income U = unfavourable effect on operating income. 3 O’Connell & Associates shows an unfavourable price and efficiency variance. The unfavourable price variance is due to the higher than budgeted rates paid to principals and juniors, partly offset by the lower rate paid to seniors. The unfavourable efficiency variance is due to the higher number of hours worked by seniors, only partially offset by the fewer hours worked by principals and juniors. The shift in mix of inputs toward more senior-hours (40% in actual mix versus 30% in budgeted mix) results in an unfavourable mix variance. The mix variance was partially offset by a favourable yield variance because the work was completed in 5,900 actual total hours compared with the 6,000 budgeted total hours, but the net effect was an increase in costs relative to the budget. Note, however, that these variances focus only on costs. Management at O’Connell & Associates would also need to consider the effects of changes in the mix, for example, on quality, and, hence, current and future revenues. 4 Management at O’Connell & Associates should use information from the variance analysis to ask questions that would lead to improvement in future performance. For example, management would want to understand why higher wage rates were paid to principals and juniors. Did it result from a general shortage of available staff in these categories or from factors specific to O’Connell? Similarly, O’Connell would want to understand reasons for the unfavourable efficiency variance. Were more senior-hours, for example, used because the seniors were not well trained or because the work processes were inappropriate Why were senior-hours used to substitute for principals and juniors Was it a conscious choice or because of unavailability of principals and juniors The analysis indicates that a strategy to use more seniors in the type of architectural jobs analysed here would only be worthwhile if the total time taken for these jobs can be further reduced. Managers would need to look at ways in which this can be done – for example, better hiring and training and better work methods. Of course, the analysis here focuses only on cost. Management would need to consider the effects of mix changes, for example, on other strategic factors like service quality and timeliness that can have favourable effects on current and future revenues and profitability. |