ACC 1020 Module 5 Budgets and Variances Homework Example

Pinelands Drum Works, Inc.: First-Quarter Budgets and January Cost Variances for the Barrens Snare

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

ACC-1020: Principles of Managerial Accounting

Mentor Name

Month Day, Year

Pinelands Drum Works, Inc.: First-Quarter Budgets and January Cost Variances for the Barrens Snare

Pinelands Drum Works, Inc., the composite New Jersey drum maker in this series, launched its Barrens Snare online line in January 2027. This homework prepares the line's first-quarter sales and production budgets, sets a standard cost card for one drum, and compares January's actual direct materials and direct labor costs with the standards. The variances show where January's costs departed from plan and point managers to what to investigate.

Part A: Sales Budget

The marketing forecast, based on the launch plan from Module 3, calls for monthly unit sales that rise toward spring, when school music programs and graduation gifts drive demand.

Part B: Production Budget

Management wants finished drums on hand at the end of each month equal to 20% of the next month's expected sales, enough to ship orders within two days. January began with 22 drums from the pre-launch run.

Part C: The Standard Cost Card

A standard cost is what one drum should cost under efficient conditions. The engineering and purchasing staff set the standards below from the launch run and the mill's price list.

Part D: January Variances

In January the company produced 220 drums. It bought and used 1,390 plies at $12.70 each and paid for 291 direct labor hours at $27.80 an hour. Standards allowed 1,320 plies (220 times 6) and 275 hours (220 times 1.25).

The variances tell a connected story. Purchasing found plies 30 cents cheaper than standard by buying a lower grade, producing a favorable price variance of $417. But the cheaper plies had more knots and voids, so assemblers rejected and replaced more of them, using 70 extra plies, an unfavorable quantity variance of $910. The rejects also slowed the line: workers spent 16 hours more than standard sorting plies and reworking shells, an unfavorable efficiency variance of $435.20. The labor rate variance reflects overtime paid during launch week. Taken together, the purchasing decision that looked like a saving cost the company more than it saved, which is why variances should be read together rather than credited or charged to departments one at a time.

Standards and budgets also shape behavior. Reviewing about 35 years of studies, Locke and Latham (2002) concluded that people given a specific, challenging target usually beat those given a loose instruction to try hard, as long as they accept the target and see how they are doing. Standards that are attainable with good effort serve that purpose; standards set impossibly tight produce constant unfavorable variances and teach people to ignore them. Hansen et al. (2003) reviewed criticisms of traditional budgeting, including the time it consumes and the games people play to set easy targets, and the alternatives firms have tried. For a company Pinelands' size, a simple monthly budget with standards reviewed each quarter keeps the benefits while limiting those costs. Williams et al. (2023) emphasize management by exception: investigate large or persistent variances, and look for causes rather than blame.

References

Hansen, S. C., Otley, D. T., & Van der Stede, W. A. (2003). Practice developments in budgeting: An overview and research perspective. Journal of Management Accounting Research, 15(1), 95-116. https://doi.org/10.2308/jmar.2003.15.1.95

Locke, E. A., & Latham, G. P. (2002). Building a practically useful theory of goal setting and task motivation: A 35-year odyssey. American Psychologist, 57(9), 705-717. https://doi.org/10.1037/0003-066X.57.9.705

Williams, J. R., Bettner, M. S., & Smith, K. R. (2023). Financial & managerial accounting: The basis for business decisions (20th ed.). McGraw-Hill Education.