McKnight Recliners manufactures leather recliners and uses flexible budgeting an
ID: 2518168 • Letter: M
Question
McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The? company's performance report includes the following selected? data:
Static Budget
Actual Results
(1,000 recliners)
(980 recliners)
Sales
(1,000 recliners x
$500
each)
$500,000
(980 recliners x
$475
each)
$465,500
Variable Manufacturing Costs:
Direct Materials
(6,000 yds. @
$8.50
/ yd.)
51,000
(6,143 yds. @
$8.30
/ yd.)
50,987
Direct Labor
(10,000 DLHr @
$9.30
/ DLHr)
93,000
(9,600 DLHr @
$9.40
/ DLHr)
90,240
Variable Overhead
(6,000 yds. @
$5.20
/ yd.)
31,200
(6,143 yds. @
$6.60
/ yd.)
40,544
Fixed Manufacturing Costs:
Fixed Overhead
60,600
62,600
Total Cost of Goods Sold
235,800
244,371
Gross Profit
$264,200
$221,129
1.
Prepare a flexible budget based on the actual number of recliners sold.
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.
3.
4.
Static Budget
Actual Results
(1,000 recliners)
(980 recliners)
Sales
(1,000 recliners x
$500
each)
$500,000
(980 recliners x
$475
each)
$465,500
Variable Manufacturing Costs:
Direct Materials
(6,000 yds. @
$8.50
/ yd.)
51,000
(6,143 yds. @
$8.30
/ yd.)
50,987
Direct Labor
(10,000 DLHr @
$9.30
/ DLHr)
93,000
(9,600 DLHr @
$9.40
/ DLHr)
90,240
Variable Overhead
(6,000 yds. @
$5.20
/ yd.)
31,200
(6,143 yds. @
$6.60
/ yd.)
40,544
Fixed Manufacturing Costs:
Fixed Overhead
60,600
62,600
Total Cost of Goods Sold
235,800
244,371
Gross Profit
$264,200
$221,129
Explanation / Answer
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Par-1. Flexible Budget Working Flexible Budget (980 Recliners) Sales 980*500 490000 Variable Manufacturing Cost: -Direct Material 6143*8.5 52216 -Direct Labor 9600*9.3 89280 -Variable Overhead 6143*5.2 31944 Fixed Manufacturing Cost: -Fixed Overheads 60600 Total Cost of Goods Sold 234039 Gross Profit 255961 Part 2: Variances F/N Material Price Variance 6143*(8.30-8.50) 1229 Favorable Material Quantity Variance 8.5*(6143-6000/1000*980) 2236 Unfavorable Labor Price Variance 9600*(9.40-9.30) 960 Unfavorable Labor Efficiency Variance 9.3*(9600-10000/1000*980) 1860 Favorable Variable Ovh Rate Variance 6143*(6.60-5.20) 8600 Unfavorable Variable Efficiency Variance 5.2*(6143-6000/1000*980) 1368 Unfavorable Fixed Overhead Rate Variance 62600-60600 2000 Unfavorable Fixed Overhead Volume Variance 60600-(980*60600/1000) 1212 Unfavorable (Budgeted-Allocated) Part-3 Manager have done reasonably good job in controllng Material and Labor cost as unfavorable variance is being almost offset by favorable variance in these two cases. However, manager could have done better in case of controlling Overhead cost where we have unfavorable variance only for Rate and Volume. Part-4 Standard help Managers/Employee to know the target level. Knowing the target wil help to control the cost. Standard help management to plan by setting unit cost which in return will help to prepare flexible and static budget