Use the following information for the next three questions. The following inform
ID: 2476390 • Letter: U
Question
Use the following information for the next three questions. The following information is available for BCo. BCo makes micro-wave ready meals. Planned production for the year was 6,000 units. 9. Prepare a flexible budget for production costs based on actual output. 10. Calculate the material variances. Label the variances, and indicate whether the variance is favorable or unfavorable. 11. Based on your answer to the previous question, identify one possible cause for each variance. Please do not say they used more or less of the input than planned. (Extra point if you can find one possible cause to explain both variances.)Explanation / Answer
The flexible budget for production costs means the standard cost of each item mentioned below is multiplied by actual units and compared with actual cost to find out the variance
Material @ 1.1 pound per unit at $5 per pound
labor at 0.2 hours per unit or in 1 hour 5 units are produced @$12 per hour
variable overhead @1/3 oven hour per unit or 1 oven hour for production of 3 units at $9 per hour
The fixed cost is same for budget units and actual units produced
The tabular form of flexible production budget is given below
B.Co
Production Budget report (Flexible)
Variable cost per unit
flexible budget
Actual
variance
favourable / unfavourable
production units
5800
5800
Variable
direct material
5.5
31900
30800
1100
favourable
labor
2.4
13920
13800
120
favourable
variable overhead
3
17400
17400
fixed cost
8000
8000
total Production cost
71220
70000
1220
favourable
The steps to calculate the direct material price variance as are as below
Step 1 – calculate the actual cost, the formula is
Actual cost = Actual quantity * actual price
Actual cost = 5600 * 5.5
Actual cost = $30,800
Step 2 – calculate the standard cost of actual quantity, the formula is
Standard cost = Actual quantity * standard price
Standard cost = 5600 * 5.5
Standard cost = $ 30,800
To calculate the material price variance the formula is
Material price variance = Actual cost – standard cost
Variance = 30800 – 30800
Variance = 0
It is no variance as actual cost is equal to standard cost
The steps to calculate the direct material usage variance as are as below.
Step 1 – to calculate the standard cost of actual quantity for, the formula is
Standard cost of actual quantity = Actual quantity * standard price
Standard cost of actual quantity = 5600 * 5.5
Standard cost of actual quantity = $30,800
Step 2 – to calculate the standard cost of standard quantity, the formula is
Standard cost of standard quantity = Standard quantity * standard price
Standard quantity = 5800 units manufactured * 1.1pounds
Standard quantity = 6380
Standard cost of standard quantity = 6380 * 5.5
Standard cost of standard quantity = $ 35,090
To calculate the material price usage variance the formula is
Material price usage variance = Standard cost of actual quantity – Standard cost of standard quantity
Variance = 30,800 – 35,090
Variance = 4290
It is favorable variance as actual quantity used for manufacturing 5800 units is less than standard quantity required to manufacture 5800
the reason for poszitive material usage is the standard material for production of 1 unit is 1.1 pound but actual usage is 0.97 pound per unit means per meal , material used is less than budget , it can be due to less wastage or defects in production during the year
B.Co
Production Budget report (Flexible)
Variable cost per unit
flexible budget
Actual
variance
favourable / unfavourable
production units
5800
5800
Variable
direct material
5.5
31900
30800
1100
favourable
labor
2.4
13920
13800
120
favourable
variable overhead
3
17400
17400
fixed cost
8000
8000
total Production cost
71220
70000
1220
favourable