Question

_{1. For the month of December, Merry Inc. expects to make 6,000 spruce trees of which it expects to sell 5,000 at a price of $100/tree. Merry Inc. budgeted the following costs for the month of December: Fixed Cost/month $84,000 $25,000 Variable Cost $45/tree produced $15/tree sold COGM S,G&A Actual records for the month of December reveal the following information: $600,000 $490,000 $100,000 Revenues COGM S,G&A No. of trees produced 7,000 No. of trees sold 5,500 Assume there is zero beginning inventory of spruce trees}

a) Prepare actual, static and flexible budget income statements for December.

b) What is the flexible budget variance and volume variance for total COGM and indicate if it is favorable or unfavorable?

c) To further investigate the flexible budget variance, Merry Inc. found that the budgeted direct labor rate was $54 per hour and expected production rate was 10 trees per hour. Actual direct labor rate was $70 per hour and actual production rate was 12 trees per hour. Compute price variance, efficiency variance and flexible budget variance for direct labor costs and indicate whether each variance is favorable or unfavorable.

Answer 1

a.

	Actual results	Flexible budget	Static budget
Revenues	$600,000	$550,000 (5,500*$100)	$500,000 (5,000*$100)
Less: Cost of goods sold	385,000 (490,000/7,000*5,500)	331,500 (5,500*$45+84,000)	309,000 (5,000*$45+84,000)
Gross profit	215,000	218,500	191,000
Less: S,G&A	100,000	107,500 (5,500*$15+25,000)	100,000 (5,000*$15+25,000)
Net income	$115,000	$111,000	$91,000

b.

Flexible budget variance = Actual results - Flexible budget

Flexible budget variance for COGM = $490,000 - 399,000 (7,000*$45+84,000) = $91,000 Unfavorable

Volume variance = Flexible budget - Static budget

Volume variance for COGM = $399,000 - 354,000 (6,000*$45+84,000) = $45,000 Unfavorable

c.

Direct Labor price variance = Actual hours*standard rate - Actual hours*actual rate

Direct Labor price variance = (7,000/12*$54) - (7,000/12*$70)

Direct Labor price variance = $31,500 - 40,833 = $9,333 Unfavorable

Direct Labor efficiency variance = Standard hours*standard rate - Actual hours*standard rate

Direct Labor efficiency variance = 7,000/10*$54 - 7,000/12*$54

Direct Labor efficiency variance = $37,800 - 31,500 = $6,300 Favorable

Flexible budget variance = Actual results - Flexible budget

Flexible budget variance = $40,833 - 37,800 = $3,033 Unfavorable