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Homework answers / question archive / Alpha Company uses budgets in controlling costs
Alpha Company uses budgets in controlling costs. The May 2020 budget report for the company's Packaging Department is as follows. Alpha Company Budget Report Packaging Department For the Month Ended May 31, 2020 Budgeted Actual Variance Manufacturing Costs Variable costs Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance Total variable Fixed costs Rent Supervision Depreciation Total fixed Total Costs €40.000 45,000 15,000 12,500 10.000 7.500 130.000 €41,000 47.300 15,200 13,000 9.600 8,000 134,100 €1.000 U 2.300 U 200 U 500 U 400 F 500 UN 4.100 U 10,000 7,000 4,000 21.000 €15000 10.000 7.000 4,000 21.000 €155.100 ¢¢¢¢ 3 € 4,1000
The monthly budget amounts in the report were based on an expected production of 50,000 units per month or 600,000 units per year. The company president was displeased with the department manager's performance. The department manager, who thought he had done a good job, could not understand the unfavorable results. In May, 55,000 units were produced, Required: a) Prepare a proper performance report for May using flexible budget data. (75%) b) Explain why does the report that you have prepared in a) is a better basis for evaluating performance than the report based on static budget data. Also comment on the variances of the initial report and the ones you have derived above in a). (25%)
Ans a :
a) First we must understand the basic concept behind the sums. When budget was made for 50000 units but actually we are making 55000 units , so we should have restated ALL the VC to 55000 , since Variable cost changes with output. But FC will remain same , so it does not matter whether it is changed or not.
b) Another thing , we should find the cost per unit of all variable cost to convert , it would become easy because VC per unit is always constant.
c) Budgeted Variable cost per unit = Total variable cost / Budgeted units
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Budget: |
Units produced = 50,000 |
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Direct materials per unit = $40,000 / 50,000 |
$0.80 |
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Direct labor per unit = $45,000 / 50,000 |
$0.90 |
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Indirect materials per unit = $15,000 / 50,000 |
$0.30 |
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Indirect labor per unit = $12,500 / 50,000 |
$0.25 |
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Utilities per unit = $10,000 / 50,000 |
$0.20 |
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Maintenance per unit = $7,500 / 50,000 |
$0.15 |
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Variable cost per unit = Direct materials + Direct labor + Indirect materials + Indirect labor + Utilities + Maintenance |
= $0.80 + $0.90 + $0.30 + $0.25 + $0.20 + $0.15 =
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Now Just multiply each VC per unit with 55000 units to get the below mention flexible budget figure |
Ex: 55000 * 0.08 / 0.90 / 0.30 / 0.25 / 0.20 / 0.15 |
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Alpha company |
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PACKAGING Department |
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Flexible budget report |
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For the month ended May 31, 2020 |
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Particulars |
Budget |
Actual cost |
Difference |
Favorable / Unfavorable / Neither favorable nor unfavorable |
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Units of Production |
55000 |
55000 |
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Variable overhead costs: |
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Direct materials |
44000.00 |
41000.00 |
3000.00 |
Favorable |
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Direct Labor |
49500.00 |
47300.00 |
2200.00 |
Favorable |
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Indirect Materials |
16500.00 |
15200.00 |
1,300.00 |
Favorable |
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Indirect labor |
13750.00 |
13000.00 |
750.00 |
Favorable |
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Utilities |
11000.00 |
9600.00 |
1400.00 |
Favorable |
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Maintenance |
8250.00 |
8000.00 |
250.00 |
Favorable |
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Total Variable |
1,43,000.00 |
13,4100.00 |
8,900.00 |
Favorable |
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Fixed costs: |
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Rent |
10,000.00 |
10,000.00 |
0.00 |
Neither Favorable nor Unfavorable |
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Supervision |
7,000.00 |
7,000.00 |
0.00 |
Neither Favorable nor Unfavorable |
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Depreciation |
4,000.00 |
4,000.00 |
0.00 |
Neither Favorable nor Unfavorable |
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Total Fixed |
21,000.00 |
21,000.00 |
0.00 |
Neither Favorable nor Unfavorable |
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Total Costs |
1,64,000.00 |
1,55,100 |
8,900.00 |
Favorable |
Ans 1 b) The report we have prepared is more rationale , since we are comparing actual units with the same activity level in budget, else comparison will be distorted.
The variance in the report as given earlier were all adverse for a simple reason, budget was for 5000 units and actual were for 55000 units. But in our report we compared 55000 units budget with same level of actual performance.
