Question

Using Flexible Budgets The following summary data are from a performance report for Hyland Company for June, during which 9,600 units were produced. The budget reflects the company’s normal capacity of 10,000 units.

Actual Costs (9,600 Units) Budget (10,000 Units) Variances Direct material ... Direct labor Variable overhead $102,600 207,900 73,800 54.300 5 $438,600 $105,000 210,000 72,000 54,000 $441,000 [$2,400 F] [2,100 F] 1,800 U 300 U [$2,400 F] Fixed overhead............................... .................. Total ...... a. What is the general implication of the performance report? Why might Hyland question the significance of the report? b. Revise the performance report using flexible budgeting and comment on the general implica- tion of the revised report.

Answer 1

Performance report should match the cost for the same volume of production. A separate variance may be provided for quantity variance. The total variance needs to be broken down into rate variance and quantity variance. Hyland may question the significance of the report as the variance related to rate is not separated from quantity variance.

Revised performance report:

	A	B	A - B	C	B - C	Rate variance + Quantity variance
	Actual costs (9600 units)	Budget (9600 units)	Rate variance	Budget (10000 units)	Quantity variance	Total variance
Direct Material	102600	100800	1800	105000	-4200	-2400
Direct Labour	207900	201600	6300	210000	-8400	-2100
Variable overhead	73800	69120	4680	72000	-2880	1800
Fixed overhead	54300	51840	2460	54000	-2160	300
Total	438600	423360	15240		-17640	-2400
Note - Positive variance is unfavourable variance and negative variance is favourable variance.

Unfavourable variance for the same quantity means that the actual cost rate per unit is more than budgeted cost rate per unit. Similarly the variance between budgeted cost at actual quantity versus budgeted cost at budgeted quantity gives quantity variance - the cost that is attributed to reduction of actual quantity from budget quantity. The sum of rate variance and quantity variance is total variance.