Question

Variance Project

The Special Widget division manufactures a product called SW for Global Corporation. The plant is a completely autonomous subsidiary that sells SWs to other subsidiaries of Global Corporation, as well as outside companies. At the beginning of the year the controller for Special Widget estimates sales and unit costs based on projections from past quarters’ data. Projected sales for the quarter are 11,000 units and budgeted unit costs are as follows:

Direct costs	Unit Costs
Raw materials (10 lbs at $3.00/lbs	$30.00
Direct Labor (.5 hours at $12/hour)	$6.00
Total direct cost per unit	$36.00

            At the end of the quarter the budget and the actual results are compared. Usually the variances between the projected budget and the actual results are negligible. However, this quarter the results are drastically different from the budget. Projections estimated $27,500 in gross profit, but actual gross profit shows a loss of $23,190. The general manager, who leads the profit center, received a variance report from production, but that didn’t explain the entire difference. Having no confidence in his controller, the general manager brought in the internal audit team from Global Corporation. As the internal audit team, the first report required should use variances to explain the entire difference in gross profit and interpret those variances to initiate further investigation or corrective action. Detailed information about production and sales is as follows:

	Actual	Budget
Production Volume (units)	11,000 units	11,000 units
Sales Volume (units)	10,000 units	11,000 units
Sales Price per unit	$45.00	$46.00
Direct labor hours	5,610 hours	5,500 hours
Direct labor cost	$66,759	$66,000
Raw Materials purchased (lbs)	120,000 lbs	110,000 lbs
Raw Materials purchased ($)	$384,000	$330,000
Raw Materials used (lbs)	115,500 lbs	110,000 lbs
Overhead Costs ($)	$84,050	$82,500

What are the projected income statement, actual income statement, and flexible budget and  relevant variances

Answer 1

Global corporation
Operating income statement
Particulars	PROJECTED	ACTUAL
Sales
11,000*46	$          5,06,000
10000*45		$         4,50,000
Total revenue	$          5,06,000	$         4,50,000
Operating expenses:
Direct material used
110000*3	$          3,30,000
115500*3.2		$         3,69,600
Direct labor cost	$             66,000	$             66,759
Overhead Costs	82500	$             84,050
Total operating expenses	$          4,78,500	$         5,20,409
Net profit	$             27,500	$           -70,409
(Total revenue - Total operating expenses)

FLEXIBLE BUDGET
Particulars	Per Unit Costs	For 11000 units
Sales	$                 46.00	$          5,06,000
Raw materials (10 lbs at $3.00/lbs	$                 30.00	$          3,30,000
Direct Labor (.5 hours at $12/hour)	$                    6.00	$              66,000
Overhead cost (82500/11000)	$                    7.50	$              82,500
Total direct cost per unit	$                 43.50	$          4,78,500
Net profit	$                    2.50	$              27,500

Material Variance
Purchase price variance.
(Actual price - Standard price) x Actual quantity
(3.20 - 3.00) * 120000
24000	unfavorable
Material yield variance
(Actual unit usage - Standard unit usage) x Standard cost per unit
(115,500 - 110,000) *3
16500	unfavorable
Actual price	= 384,000 / 120,000	$       3.20
Standard price	= 330,000/110,000	$       3.00
Actual Quantity purchased	1,20,000
Actual unit usage	115,500 lbs
Standard unit usage	110,000 lbs
Standard cost per unit	$                           3.00
Direct labor price variance = (SR – AR) x AH
(12 -11.9) * 5610
$                                            561	favorable
standard rate (SR)	66000/5500	$    12.00
the actual rate (AR),	66759/5610	$    11.90
actual hours worked (AH):	5610
Direct labor quantity variance = SR x (SH – AH)
12 * (5500- 5610 )
$                                         1,320	unfavorable
total standard hours (SH)	5,500 hours
Sales Price Variance
(Actual price – Standard price)* Actual quantity sold
(45-46)*10000
$                                      10,000	unfavorable
Sales Volume Variance
(Budgeted quantity – Actual quantity) * Standard price
(11000 - 10000) * 46
$                                      46,000	unfavorable
Total overhead variance
budgeted cost - actual cost
82500-84050
$                                         1,550	unfavorable