Question

Mario Co. makes plumbing supplies. One of the main products they sell is a drain cleaner called Fireball. When Mario Co. was preparing their budget for 2018, they had estimated these numbers in regard to Fireball Drain cleaner: Units Sold: 110,000 bottles Revenue: $742,500 Direct Material per bottle: 1.4 liters Total Cost of Direct Materials: $52,360 Total Direct Labor Manufacturing Hours: 11,000 hours Labor Wage Rate: $10 per hour Variable Manufacturing Costs (based off DLMH): $60,500 Fixed Manufacturing Costs : $10,800 On December 31st, Mario Co. had these numbers regarding the manufacture and sale of Fireball Drain Cleaner: Units Sold: 109,600 bottles Average Price per Unit: $6.80 Average Direct Material per bottle: 1.5 liters Average cost per liter of DM: .33 per liter Total Direct Labor Manufacturing Hours: 10,940 hours Total Direct Labor Manufacturing Costs: $112,135 Variable Manufacturing Costs (based off DLMH): $62,905 Fixed Manufacturing Costs : $11,272 Using this information, please do the following: a. Put together the static budget for 2018 b. Put together the flexible budget for 2018 c. Calculate the Flexible Budget Variance and the Sales Volume Variance for all items (Level 2 analysis) d. Calculate the Spending and Efficiency variance for Direct Materials and Direct Labor (Level 3 analysis) Static Budget: Flexible Budget: Level 2 Analysis: Level 3 Analysis: Efficiency Variance for Direct Materials:__________________________ Spending Variance for Direct Materials:___________________________ Efficiency Variance for Direct Labor:__________________________ Spending Variance for Direct Labor:___________________________

Answer 1

Answer A

Static Budget
Sales Revenue	742,500
Less: Variable Costs
Direct Material	52,360
Direct labor (10*11000)	110,000
Variable overhead	60,500
Total Variable Costs	222,860
Contribution Margin	519,640
Fixed Overhead Cost	10,800
Operating income	508,840

Answer B

Flexible Budget
Sales Revenue ((742500/110000)*109600)	739,800
Less: Variable Costs
Direct Material ((52360/110000)*109600)	52,170
Direct labor ((110000/110000)*109600)	109,600
Variable overhead ((60500/110000)*109600)	60,280
Total Variable Costs	222,050
Contribution Margin	517,750
Fixed Overhead Cost	10,800
Operating income	506,950

Answer C

Actual results
Sales Revenue (6.80*109600)	745,280
Less: Variable Costs
Direct Material (1.5*0.33*109600)	54,252
Direct labor	112,135
Variable overhead	62,905
Total Variable Costs	229,292
Contribution Margin	515,988
Fixed Overhead Cost	11,272
Operating income	504,716

Company Name
Production department flexible performance report
For the year ended
	Actual result	Flexible Budget Variance		Flexible budget	Sales volume Variance		Planning (Static) budget
Units	3,100	106,500	U	109,600	400	U	110,000
Sales Revenue	745,280	5,480	F	739,800	2,700	U	742,500
Less: Variable Costs
Direct Material	54,252	2,082	U	52,170	190	F	52,360
Direct labor	112,135	2,535	U	109,600	400	F	110,000
Variable overhead	62,905	2,625	U	60,280	220	F	60,500
Total Variable Costs	229,292	7,242	U	222,050	810	F	222,860
Contribution Margin	515,988	1,762	U	517,750	1,890	U	519,640
Fixed Overhead Cost	11,272	472	U	10,800	-	None	10,800
Operating income	504,716	2,234	U	506,950	1,890	U	508,840

U means Unfavorable Variance

F means Favorable Variance

None means No variance

Hint:

Increase in revenue, Contribution margin , net income, operating income is Favorable event.

Decrease in revenue, Contribution margin , net income, operating income is Unfavorable event.

Increase in expense or cost is Unfavorable event.

Decrease in expense or cost is Favorable event.

How to calculate Increase ?

For Flexible Budget Variance, Increase (decrease) = Actual result Less Flexible budget

For Sales volume Variance, Increase (decrease) = Flexible budget Less Planning (Static) budget

Answer D

	Minus sign indicate Favorable variance.
	Measure	liter
	Standard price per liter	$            0.34
	Actual price per liter	$            0.33
109600*1.40	Standard quantity in liters	153440
109600*1.50	Actual quantity purchased in liters	164400
	Actual quantity used in liters	164400
	Actual price per liter	0.33
Less	Standard price per liter	-0.34
	Difference	-0.01
Multiply	Actual quantity purchased in liters	164400
	Material Spending variance	$        (1,644)
	Indicate	Favorable
	Actual quantity used in liters	164400
Less	Standard quantity in liters	-153440
	Difference	10960
Multiply	Standard price per liter	0.34
	Material Efficiency variance	$          3,726
	Indicate	Unfavorable

	Minus sign indicate Favorable variance.
	Measure	Hour
	Standard rate per Hour	$   10.000000
112315/10940	Actual rate per Hour	$   10.266453
(11000/110000)*109600	Standard labor Hours	10960
	Actual labor Hours	10940
	Actual rate per Hour	10.266453
Less	Standard rate per Hour	-10.000000
	Difference	0.266453
Multiply	Actual labor Hours	10940
	Labor Spending variance	$            2,915
	Indicate	Unfavorable
	Actual labor Hours	10940
Less	Standard labor Hours	-10960
	Difference	-20
Multiply	Standard rate per Hour	10.00
	Labor Efficiency variance	$             (200)
	Indicate	Favorable

Summary of Answer
Material
Material Spending variance	1,644	Favorable
Material Efficiency variance	3,726	Unfavorable
Labor
Labor Spending variance	2,915	Unfavorable
Labor Efficiency variance	200	Favorable