Determining and interpreting flexible budget variances
Use the standard price and cost data supplied in problem 15-18. Assume that Holligan actually produced and sold 31,000 books. The actual sales price and costs incurred follow.
Actual price and variable costs:
Sales price $36.00
Materials $9.10
Labor $4.10
Overhead $6.20
General, selling, and administrative $6.10
Actual fixed costs:
Manufacturing $120,000.00
General, selling, and
administrative $55,000.00
a. Determine the flexible budget variances. Provide another name for the fixed cost flexible budget variance.
b. Indicate whether each variance is favorable (F) or unfavorable (U).
c. Identify the management position responsible for each variance. Explain what could have caused the variance.
is direct labor generally cosided to be a fixed cost?
To determine and interpret the flexible budget variances, follow these steps:
a. Calculate the flexible budget variances:
1. Calculate the flexible budget for each cost category:
- Sales: Flexible Budget Sales = Actual Sales Volume × Budgeted Sales Price
- Materials, Labor, Overhead, and General, selling, and administrative costs: Flexible Budget Cost = Actual Sales Volume × Budgeted Cost per Unit
2. Calculate the flexible budget variance for each cost category:
- Flexible Budget Variance = Actual Cost incurred - Flexible Budget Cost
3. Calculate the fixed cost flexible budget variance:
- Fixed Cost Flexible Budget Variance = Actual Fixed Costs - Budgeted Fixed Costs
b. Determine whether each variance is favorable (F) or unfavorable (U):
- If the actual cost is less than the flexible budget cost, it is favorable (F).
- If the actual cost is greater than the flexible budget cost, it is unfavorable (U).
c. Identify the management position responsible for each variance and explain the possible causes:
1. Sales price variance:
- Responsibility: Sales management
- Possible causes: Variation in market demand, pricing decisions, promotional activities, competition, customer preferences.
2. Materials cost variance:
- Responsibility: Production or purchasing management
- Possible causes: Changes in material prices, material quality, supplier contracts, waste or scrap, inventory management.
3. Labor cost variance:
- Responsibility: Production or HR management
- Possible causes: Changes in wage rates, productivity levels, staffing, training, labor allocation, work methods.
4. Overhead cost variance:
- Responsibility: Production or management accounting
- Possible causes: Changes in production volume, overhead rates, utilities, machine maintenance, allocation methods.
5. General, selling, and administrative cost variance:
- Responsibility: General management
- Possible causes: Changes in business activities, cost control efforts, expenses related to sales, marketing, administration, research, legal, or other general activities.
6. Fixed cost flexible budget variance (also known as the spending variance):
- Responsibility: General management
- Possible causes: Deviations in actual fixed costs compared to the budgeted fixed costs, unexpected expenses, changes in business strategies or operations, economic factors.
Note: The variance analysis provides insight into the performance and effectiveness of various management positions in controlling costs and profitability. The causes of variances can be further investigated to identify corrective actions and improvement opportunities.