Houston Corporation considers materials and labor to be completely variable cost

Question

Houston Corporation considers materials and labor to be completely variable costs. Expected production for the year is 50,000 units.

    At that level of production, direct materials cost is budgeted at $198,000, and direct labor cost is budgeted at $450,000. Prepare a flexible budget for materials and labor for possible production levels of 52,500, 60,000, and 67,500 units of product.

    Assume that in the previous exercise the actual production was 60,000 units, materials cost was $247,000, and labor cost was $510,000. What are the budget variances?

Show the analysis in a table format. Write a one-paragraph interpretation of the information presented in the table.

Explanation / Answer

Since both material & labour costs are completely variable costs, let's compute the per unit cost for material & labour which is the cost given in the question divided by 50000 units of production as shown in the 1st table below. We will then use the per unit costs so computed to prepare the material & labor cost budgets for the different possible levels of production given in the question as shown in the second table.

Budget for different levels of production

At 60000 units of actual production, the below table shows the variances Vs budget:

Basically at 60000 units of actual production, against a budgeted material cost of $ 237,600, the actual costs were $ 247,000 resulting in an adverse variance of $ 9,400 which indicates lower material yields/adverse usage variance. For direct labor cost, the budget was $ 540,000 but the actuals were $ 510,000 and therefore the variance is favourable $ 30,000 which shows better efficiency of labour than that considered in the budget.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.