Part 1- Prepare a flexible budget based on the actual number of recliners sold.
ID: 2511455 • Letter: P
Question
Part 1- Prepare a flexible budget based on the actual number of recliners sold.
Part 2- Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
Part 3- Have McKnight's managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?
Part 4- Describe how McKinght's managers can benefit from the standard cost system.
Static Budget Actual Results (1,025 recliners) (1,005 recliners) Sales (1,025 recliners X $500 each) 512,500 (1,005 recliners X $495 each) $ 497,475 Variable Manufacturing Costs: (6,150 yds. @ $8.50/yard) (6,300 yds. @ $8.30/yard) (10,250 DLHr $9.20/DLHr) (9,850 DLHr $9.40/DLHr) (6,150 yds. @ $5.10/yard) (6,300 yds. @ $6.50/yard) Direct Materials 52,275 52,290 Direct Labor 94,300 92,590 Variable Overhead 31,365 40,950 Fixed Manufacturing Costs: Fixed Overhead Total Cost of Goods Sold Gross Profit 62,730 240,670 $271,830 64,730 250,560 $246,915Explanation / Answer
1. Flexible Budget:
2. Direct Material Variances: $ 1,035 U
Direct material rate variance = $ ( 8.50 - 8.30) x 6,300 = $ 1,260 F
Direct materials efficiency variance = ( 6,030 - 6,300) x $ 8.50 = $ 2,295 U
Direct Labor Variances : $ 130 U
Direct labor rate variance = $ ( 9.20 - 9.40) x 9,850 = $ 1,970 U
Direct labor efficiency variance = ( 10,050 - 9,850) x $ 9.20 = $ 1,840 F
Variable Overhead Variances: $ 10,197 U
Variable overhead rate variane = $ ( 5.10 - 6.50) x 6,300 = $ 8,820 U
Variable overhead efficiency variance = ( 6,030 - 6,300) x $ 5.10 = $ 1,377 U
Fixed overhead volume variance = 0.
Fixed overhead cost variance = $ 62,730 - $ 64,730 = $ 2,000 U
3. It is clear from the preceding computations, that all the cost categories have net unfavorable variances. Therefore, it is inferred that McKnight's managers have done a poor job of controlling costs.
4. The managers can delve deeper into the unfavorable variances to find out the originating causes, and take corrective action. It is also possible that the predetermined standards are outdated, unrealistic or unachievable. If that is the case, the managers should set about revising the standards.
Sales ( 1,005 x $ 500) $ 502,500 Manufacturing Costs Variable Manufacturing Costs Direct Materials ( 6,150 / 1,025 x 1,005) yards x $ 8.50 per yard 51,255 Direct Labor ( 10,250 / 1,025 x 1,005) DLH x $ 9.20 per DLH 92,460 Variable Overhead ( 6,150 / 1,025 x 1,005) yards x $ 5.10 per yard 30,753 174,468 Fixed Manufacturing Costs 62,730 Total Cost of Goods Sold 237,198 Budgeted Gross Profit 265,302