Question

Exercise 24-4 Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows. Indirect labor Indirect materials Utilities $ 1.20 0.80 0.40 Fixed overhead costs per month are Supervision $3,600 , Depreciation $1,000, and Property Taxes $ 900. The company believes it will normally operate in a range of 8,000 - 13,700 direct labor hours per month. Assume that in July 2017, Myers Company incurs the following manufacturing overhead costs. Variable Costs Indirect labor Indirect materials Utilities $ 13,920 9,320 4,240 Fixed Costs Supervision Depreciation Property taxes $ 3,600 1,000 900

Answer 1

flexible budget changes with the change in levels of activity.It is a budget which recognizes the effect of fluctuations in sales on variable , fixed and mixed cost.it is well known fact that estimated activity of budget is not always correct and that changes will have to be made as per actual known activity level to find exact variances.variable costs changes with change in levels of activity however fixed cost remains same at all levels.

we will prepare flexible

	Budget	Actual cost	difference
Direct Labor hours	11,800	11,800
variable costs
indirect labor [$1.20]	$14,160[11,800*1.20]	$13,920	$240[14160-13920]	Favorable
indirect materials [$0.80]	$9,440[11800*0.80]	$9,320	$120[9440-9320]	Favorable
utilities [$0.40]	$4,720[11800*0.40]	$4,240	$480[4720-4240]	Favorable
total variable costs	$28,320[14160+9440+4720]	$27,480 [13920+9320+4240]	$840[28320-27480]	Favorable
fixed costs
supervision	$3,600	$3,600	0	Neither favorable nor unfavorable
depreciation	$1,000	$1,000	0	Neither favorable nor unfavorable
property taxes	$900	$900	0	Neither favorable nor unfavorable
Total fixed costs	$5,500	$5,500	0	Neither favorable nor unfavorable
Total costs	$33,820[28320+5500]	32,980[27480+5500]	$840	Favorable

As the actual cost is lower than budgeted the variance is favorable.

	Budget	Actual costs
Direct Labor hours	11,200	11,200
variable costs
indirect labor [$1.20]	$13,440[11,200*1.20]	$13,920	$480[13440-13920]	unFavorable
indirect materials [$0.80]	$8,960[11200*0.80]	$9,320	$360[8960-9320]	unFavorable
utilities [$0.40]	$4,480[11200*0.40]	$4,240	$240[4480-4240]	Favorable
total variable costs	$26,880[13440+8960+4480]	$27,480 [13920+9320+4240]	$600[26880-27480]	unFavorable
fixed costs
supervision	$3,600	$3,600	0	Neither favorable nor unfavorable
depreciation	$1,000	$1,000	0	Neither favorable nor unfavorable
property taxes	$900	$900	0	Neither favorable nor unfavorable
Total fixed costs	$5,500	$5,500	0	Neither favorable nor unfavorable
Total costs	$32,380[26880+5500]	32,980[27480+5500]	$600	unFavorable

Actual indirect labor and indirect material being higher than budgeted the variance is unfavorble