2 (10 points). Jar Jar, Inc., produces a practical joke concoction that can make

Question

2 (10 points). Jar Jar, Inc., produces a practical joke concoction that can make anyone who drinks it to become a bumbling buffoon and a general annoyance for 15 minutes. The liquid concoction is sold in 42 ounce cans and has no known side effects. Jar Jar employs a team of sales representatives that consist of Tuskens and Jawas who are of course paid varying amounts of commission. Given the narrow margins in the practical jokes industry, Jar Jar relies on tight standards and cost controls to manage its operations. Jar Jar has the following budgeted standards for the month of June Average selling price per can Total direct materials cost per can Direct manufacturing labor cost per hour Average sales commission cost per can Fixed administrative and manufacturing overhead Average labor productivity rate 30 3.60 15.00 0.72 990,000 100 cans per hour Jar Jar budgeted sales of 700,000 cans for June. At the end of the month, the controller Rugor Nass revealed that actual results for June had deviated from the budget in several ways 1, unit sales and production were 90% of plan. 2. Actual average selling price decreased to $8.20 3. Productivity dropped to 90 cans per hour 4. Actual direct manufacturing labor cost was $15.20 per hour 5. Actual total direct material cost per unit increased to $3.90. 6. Actual sales commissions were $0.70 per can 7. Fixed overhead costs were $110,000 above budget. Calculate the following amounts for Jar Jar for June: Required a. Static-budget and actual operating income b. Static-budget variance for operating income c. Flexible-budget operating income d. Flexible-budget variance for operating income e. Sales-volume variance for operating income f. Price and efficiency variances for direct manufacturing labor g. Flexible-budget variance for direct manufacturing labor

Explanation / Answer

a) Static - Budget & Actual operating income

b)Static budget variance for operating income = Actual opearting income - Static budget operarting income = 1061600 - 1691000 =629400 U

c)Flexible budget is prepared for the actual units produced using the budgetted rates, so flexible budget will be prepared for 630000 units using bugetted data

d)Flexible budget variance for operating income = Actual operating income - Flexible Budget operating Income = 1061600 - 1422900 = 361300 U

e) Sales volume variance for operating income refers to the variance between flexible budget operating income & static budget operating income due to change in sdales volume (i.e., from 700000 units to 630000 units),

So basically Sales volume var for operating income = Flexible budget operating income - static budget operating income

= 1422900 - 1691000 = 268100 U

Always, remember Static Budget Variance for operating income = Flexible budget variance for operating income + Sales volume var for opearting Income

i.e., 629400 U = 361300 U + 268100 U

f) In order to calculate, price & efficiency variances for direct manufacturing labour, standard rate & standard labour hrs is required

Standard Rate = 15 per labour hr

Standard labour Hrs = (630000/100) = 6300 hrs

Standard cost = 6300*15 = 94500 same as flexible budget labour cost

Actual labour cost = Actual hrs * Actual rate = (630000/90) * 15.2 = 7000 *15.2 = 106400

Price variance = (Standarde rate - Actual) * Actual Hrs = (15-15.2) * 7000 = 1400 U

Efficiency variance = (Standard Hrs - Actual hrs) * std rate = (6300-7000)*15 = 10500 U

g) Flexible budget variance for direct manufacturing labour = Flexible direct manufacturing cost - Actual direct labour manufacturing cost

= 94500- 106400 = 11900 U

Particulars workings Static budget Workings Actual Sales 700000@8.3 5810000 630000@8.2 5166000 Less: Costs Material Cost 700000@3.6 2520000 630000@3.9 2457000 Labour Cost (700000/100)*15 105000 (630000/90)*15.2 106400 Commission 700000@0.72 5040000 630000@0.70 441000 Fixed OH 9900000 1100000 Operating Profit 1691000 1061600

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