02 Jan Flexible Budget

Part 1 Cost variance analysis

Gourmet, Inc. produces containers of frozen food. During October the company had the following actual production and costs.

Actual Containers produced in October 725

Variable Overhead $5,500

Fixed Overhead $14,000

Direct Labor cost $75,600 Which is 4,000 Direct labor hours

Actual material purchased $33,000 Which is 15,000 pounds

Actual Material pounds used 14,900 pounds

Overhead is budgeted and applied using direct-labor hours. Standard cost and annual budget information are as follows:

Standard cost per container

Direct Labor 5 hours at $18 $90

Direct Material 20 poundsat $2 $40

Variable overhead 5 Direct labor hours at $1.50 $7.50

Fixed Overhead 5 Direct labor hours at $3 $15

Total $152.50

Budgeted Monthly Fixed Overhead $12,500

Required: Make sure you do not forget to label the variances U or F. You need to show your work either by cell reference or showing your calculation to the side.

1. Calculate the direct materials price and quantity variance.

Materials price variance

Materials Quantity variance

2. Calculate the direct labor rate and efficiency variances.

Labor rate variance

Labor Efficiency variance

3. Calculate the variable overhead spending and efficiency variances.

Variable overhead spending variance

Variable overhead efficiency variance

4. Calculate the fixed overhead budget variance.

Fixed overhead budget variance

5. Pick out the two variances that you computed above that you think should be further investigated. Explain why you picked these 2 variances and what might be the possible cause of the variances.

Problem 2 Performance reporting

Crafts Inc., is a manufacturer of furniture.

The company has 2 responsibility centers: Production and Selling and Distribution.

Production and administration are cost centers while Selling and Distribution is a profit center.

Presented below are the budgeted and actual contribution income statement for October along with applicable unit information.

Budgeted unit information:

Units 900

Sale price per unit $250

Direct material per unit$50

Direct labor per unit $20

Variable manufacturing overhead per unit $15

Variable selling and distribution per unit 60

Actual Units: 1,000

Craft Inc.

Budgeted Contribution Income Statement

For Month of October

Sales $2,25,000

Less Variable costs

Variable cost of goods sold:

Direct materials $45,000

Direct labor 18,000

Manufacturing overhead 13,500 $76,500

Selling and distribution 54,000 (1,30,500)

Contribution Margin 94,500

Less Fixed Costs:

Manufacturing overhead 40,000

Selling and Distribution 30,000 (70,000)

Net Income 24,500

Craft Inc.

Actual Contribution Income Statement

For Month of October

Sales $2,75,000

Less Variable costs

Variable cost of goods sold:

Direct materials $50,000

Direct labor 25,000

Manufacturing overhead 20,000 $95,000

Selling and distribution 88,000 (1,83,000)

Contribution Margin 92,000

Less Fixed Costs:

Manufacturing overhead 38,000

Selling and Distribution 40,000 (78,000)

Net Income(Loss) 14,000

Required:

1. Prepare a flexible budget performance report for Production that compares actual and allowed costs.

2. Prepare a flexible budget performance report for selling and distribution that compares actual and allowed costs.

3. Determine the revenue variance.

4. Determine the sales price variance.

5. Determine the sales volume variance.

6. Explain to management the areas that should be investigated. You should also include why the actual income is less than budgeted Explain why you picked these areas to look at.

1. Prepare a flexible budget performance report for Production that compares actual and allowed costs.

Production Department

Flexible Budget Performance Report

For Month of October

Actual costs Flexible Budget Cost Flexible Budget Variances Designation U or F

2. Prepare a flexible budget performance report for selling and distribution that compares actual and allowed costs.

Selling and Distribution Cost Center

Flexible Budget Performance Report

For Month of October

Actual costs Flexible Budget Cost Flexible Budget Variances Designation U or F

3. Determine the revenue variance.

4. Determine the sales price variance.

5. Determine the sales volume variance.

6. Explain to management the areas that should be investigated. You should also include why the actual income is less than budgeted Explain why you picked these areas to look at.