Question

Class Exercise for Standard Cost BUDGET 10,000 FLEXIBLE Units of output planned and actual ACTUAL 9,000 Direct material units per unit of output units price Labor units per unit of output hours rate Sales 300,000 306,000 Less variable costs of manufacturing Direct Material Direct Labor Factory Overhead Total 120,000 40,000 60,000 220,000 117,000 32.400 66,000 215,400 Selling and Administration 50,000 50,000 Contribution Margin 30,000 40,600 Less Fixed Costs Manufacturing Selling and Administration 12,000 10,000 14,000 10,000 Operating Income 8.000 16,600

1. Prepare the flexible budget using the information provided. Show calculations/explain where the numbers come from.

2. Answer the corresponding questions about the variances of the budget.

Answer 1

Answer-1:

When a budget is adjusted to actual activity level, we call it a flexed budget. It is the budget which would have been prepared at the beginning of the period, had the management known the exact actual output.

Since revenues and variable costs vary directly with number of units, we need to calculate budgeted price and variable costs per unit by dividing static budget amounts by 10,000 budgeted units. This yields price per unit as below:-

Total Per unit $300,000 $ 120,000 $ 40,000 $ 60,000 $ 50,000 $ Sales Direct material Direct labour Variable factory overhead Selling and administration 30 12 4 6 LO

These figures are then multiplied by actual units sold i.e. 9,000 units to obtain flexible budget revenue and variable costs.

The fixed costs are constant and remain same in both static and flexed budgets.

FLEXIBLE BUDGET FOR 9,000 UNITS Particulars Amount $ Sales 270,000 Direct material 108,000 Direct labour 36,000 Variable factory overhead 54,000 Selling and administration 45,000 Total variable cost 243,000 Contribution margin 27,000 Less: Fixed cost: Manufacturing 12,000 Selling and administration 10,000 Total variable cost 22,000 Operating income 5,000

Answer-2:

The operating income variance is 11,600 favouravle because actual exceeded the budget.

Due to Sales volume variance = (Budgeted qty × BP) - (Actual qty × BP)

                                      = (9,000 × 30) - (9,000 × 30) = 270,000 - 270,000 = 0

Due to flexible budget variance = (Actual qty × BP) - (Actual qty × AP)

                                                   = (9,000 × 30) - 306,000 = 36,000 F

Material price variance = (AQ × BP) - (AQ × AP) = (9,000 × 12) - 117,000 = 9,000 U

Material efficiency variance = (BQ × BP) - (AQ × BP) = (9,000 × 12) - (9,000 × 12) = 0

Total Per unit Sales $300,000 $ 30 Direct material 120,000 $ 12 Direct labour 40,000 $ 4 Variable factory overhead | 60,000$ 6 Selling and administration 50,000 $ 5

$ FLEXIBLE BUDGET FOR 9,000 UNITS Particulars Sales Direct material Direct labour Variable factory overhead Selling and administration Total variable cost Contribution margin Less: Fixed cost: Manufacturing Selling and administration Total variable cost Amount 270,000 108,000 36,000 54,000 45,000 243,000 27,000 12,000 10,000 22,000 Operating income 5,000

FLEXIBLE BUDGET VARIANCE ANALYSIS Particulars Actual Budget Variance Sales 306000 $ 270,000 $ 36,000 F Direct material 117000 108,000$ 9,000 F Direct labour 32400 36,000 $ (3,600) U Variable factory overhead 66000 54,000 $ 12,000 F Selling and administration 50000 45,000 $ 5,000 F Total variable cost 265400 243,000 $ 22,400 F Contribution margin 40600 27,000 $ 13,600 F Less: Fixed cost: Manufacturing 14000 12,000 $ 2,000 F Selling and administration 10000 10,000 $ - Total variable cost 24000 22,000 $ 2,000 F T Operating income 16600 5,000 $ 11,600 | F