Question

QUESTION THREE

Cartlidge Ltd manufactures and sells plastic kitchen containers through associated retail outlets throughout Australia. To compete more effectively it has recently introduced a budgetary control system to assist with planning and control of operations. Detailed below are the budgeted and actual performance figures for their most popular plastic container sold for the month of December 2018,

                                                BUDGET (static)                     ACTUAL

Output (production and sales)    3000 Units                                3,300 Units

                                                $                                              $                     

Sales                                        $45,000                                    $47,850

                                                (3,000 unit @ $15)                    (3,300 units @ $14.50)

Raw Materials                           ($18,000)                                  ($20,140)            

(36,000 units                             (38000 units                                                 @ 50 cents per unit)                        @ 53 cents per unit)                 

Labour                                      ($6,000)                                    ($7,040)            

                                                (300 hours                                (320 hours

                                                @$20 per hour)                         @22 per hour)

Fixed Overheads                       ($5,000)                                    ($4,700)

Operating Profit                        $16,000                                    $15,970

REQUIRED:  

1. Based on the information above calculate a flexed budget based on actual output / sales levels for the month of December 2018                              

2. Describe the purpose of the flexed budget in identifying deviations from planned performance. (limit 60 words)

3. Based on information above reconcile the operating profit under a static budget to the actual operating profit breaking down the reconciliation and identifying specific variances in as much detail as possible.                                                

4. Assuming that the standards were all well set in terms of labor times and rates and material usage and price, suggest one feasible reason for each variance you have identified in (c), from what you know about the company’s performance in December 2018. (HINT: As part of your answer attempt to explain why a favorable variance in one area might explain an unfavorable variance in another area).      (80 word limit)

Answer 1

	BUDGET (Static)	BUDGET (Flexible)
Output	3,000 units	3,300 units
Sales	$                     45,000	$                     49,500
	(3,000 X 15)	(3,300 X 15)
Raw Materials	$                   (18,000)	$                   (19,800)
	(3,000 X 12 X 0.5)	(3,300 X 12 X 0.5)
Labor	$                     (6,000)	$                     (6,600)
	(3,000 X 1/10 X 20)	(3,300 X 1/10 X 20)
Fixed Overheads	$                     (5,000)	$                     (5,000)
Operating Profit	$                     16,000	$                     18,100

b.

In the given question, the static budget is for 3,000 units and actual production is 3,300 units. So comparison of these 2 will never give correct variances. Flexible budget solves this problem. It helps us to compare budget with actuals when the number of units in actual and static budget differ.

c and d

Variance	Reason		$   16,000
Sales Variance
Price	Since the number of units were more, the prices were less. This is due to demand and supply effect. At lower prices demand is more.	$ (1,650)		(Actual Price - Budgeted Price) X Actual Qty
Quantity	The qty have increased because the prices were less. This is favorable due to unfavorable price variance	$    4,500	$      2,850	(Actual Qty - Budgeted Qty) X Budgeted Price
Material Variance
Price Variance	This is unfavorable maybe because of unexpected demand so prices could not be negotiated. 3,000 were budgeted but 3,300 were produced.	$ (1,140)		(Budgeted Price - Actual Price) X Actual Qty
Usage Variance	Usage variance is unfavorable due to increase in qty as compared to budgeted.	$ (1,000)	$   (2,140)	(Budgeted Qty - Actual Qty) X Budgeted Price
Labor Variance
Price Variance	This is unfavorable maybe because of unexpected demand so prices could not be negotiated. 3,000 were budgeted but 3,300 were produced.	$      (640)		(Budgeted Price - Actual Price) X Actual Qty
Usage Variance	Usage variance is unfavorable due to increase in qty as compared to budgeted.	$      (400)	$   (1,040)	(Budgeted Qty - Actual Qty) X Budgeted Price
Overhead Variance
Actual - Standard	It is favorable because of higher efficiency. More units were produced in comparatively lesser time.		$         300	Budgeted - Actual
Profit as per actual			$   15,970