Calculate the flexed and actual budget. Calculate the following variances: Sales

Question

Calculate the flexed and actual budget.

Calculate the following variances:

Sales variances; volume and price

Direct material variances; usage and price

Direct labour variances; efficiency and rate

Fixed overhead variance; spending

Present the above information as a part of a Business Report, providing possible explanations for the variances that you have calculated and suggestions as to how the company might try to improve its cost control.

Orchid Ltd. is a small furniture manufacturer. It was established as a family-owned business 30 years ago and prides itself on high-quality products. Most of its products are made to order as a result of direct orders from Internet-based sales. Typically the company has been profitable, operating at the top end of the market; recently, however, costs appear to have been increasing and the company has also seen a decline in its sales. The workforce is highly skilled and recently several of the experienced craftspeople who make the products have retired, and the company has had problems recruiting, training and retaining suitably skilled employees. One of its products, a table, has the following standard costs Direct materials (8m £30/m) 240.00 Direct labour (10 hours £25hr) 250.00 Fixed overheads 160.0 650.00 Selling price Standard profit margin 300.00 The table is made from solid oak and the above materials reflect the size of the table in square metres. The labour required to make the table is highly skilled The monthly production and sales are planned to be 800 units. The actual results for March were as follows Sales revenue 753.300 Less Direct materials (192,500) (7,000m) Direct labour (221,000) (8500 hours) Fixed overheads (130,000) Operating proft 209,800 There were no opening or closing stocks. The company manufactured and sold 810 tables; this is more than budgeted due to a successful marketing campaign

Explanation / Answer

1)

2)

Sales variances = Actual Sale - Budgeted Sale

Sales variances = 753300 - 760000

Sales variances = 6700 Unfavorable

3)

Sales Volume Variance = (Actual sale qty - budgeted sales qty)*sale price

Sales Volume Variance = (810-800)*950

Sales Volume Variance = 9500 Favorable

4)

Sale Price Variance = (Actual Sale Price - Budgeted Sale Price)*Actual sale qty

Sale Price Variance = (753300/810 - 950)*810

Sale Price Variance = 16200 Unfavorable

Actual budget Particular Per Unit No of Unit Amount [a] [b] [c = a*b] Sales Revenue                     950 800        760,000 Expenses: Direct Material                     240 800        192,000 Direct Labor                     250 800        200,000 Fixed Overhead                     160 800        128,000 Total expenses                     650 800        520,000 Net operating income                     300 800        240,000 Flexed Budget Particular Per Unit No of Unit Amount [a] [b] [c = a*b] Sales Revenue                     950 810        769,500 Expenses: Direct Material                     240 810        194,400 Direct Labor                     250 810             4,325 Fixed Overhead        128,000 Total expenses        326,725 Net operating income        442,775

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