Question

​Company's budgeted prices for direct​ materials, direct manufacturing​ labor, and direct marketing​ (distribution) labor per​ attaché case are $39​, $7​, and $12​, respectively. The president is pleased with the following performance​ report:
Actual Costs Static Budget Variance
Direct materials 564,000 $400,000 $36,000 F
Direct manufacturing labor 78,000 80 2,000 F
Direct marketing (distribution) labor 110,000 120,000 10,000F


Actual output was 9,100 ​attaché cases. Assume all three​ direct-cost items above are variable costs.

Requirement:
a. Is the​ president's pleasure​ justified?
b. Prepare a revised performance report that uses a flexible budget and a static budget.

Answer 1

Answer:

a) The president's pleasure is not justified because the budget performance was unfavorable in all the variable costs.

b) Revised Flexible Performance Report

                                                             Flexible        Actual         Variance

                                                             Budget        Costs

Direct materials                                $354,900    $564,000    $209,100 U

Direct manufacturing labor                  63,700         78,000         14,300 U

Direct marketing (distribution) labor 109,200         110,000             800 U

                                                           Flexible        Static            Variance

                                                             Budget       Budget

Direct materials                                $354,900    $400,000       $45,100 U

Direct manufacturing labor                  63,700         80,000         16,300 U

Direct marketing (distribution) labor 109,200        120,000         10,800 U

Explanation:

a) Data and Calculations:

                                                        Actual Costs  Static Budget   Variance

Direct materials                                 564,000      $400,000      $36,000 F

Direct manufacturing labor                 78,000          80,000           2,000 F

Direct marketing (distribution) labor 110,000         120,000         10,000 F

b) Budgeted Prices:

Direct materials = $39

Direct labor = $7

Direct marketing labor = $12

Actual Output = 9,100

Flexible Budget:

Direct materials = $354,900 ($39 x 9,100)

Direct labor = $63,700 ($7 x 9,100)

Direct marketing labor = $109,200 ($12 x 9,100)

The flexible budget for direct materials, labor and marketing were flexed in line with actual output.