Question

SanBox Company is choosing new cost drivers for its accounting system. One driver is labor hours; the other is a combination of machine hours for unit variable costs and number of setups for a pool of batch-level costs. Data for the past year follow.

Budget Actual
Labor hours 200,000 200,000
Machine hours 360,000 450,000
Number of setups 3,000 3,300
Unit variable cost pool $1,600,000 $2,000,000
Batch-level cost pool $900,000 $990,000
Assume that both cost pools are combined into a single pool, and labor hours is the driver. The total flexible budget for the actual level of labor hours and the total variance for the combined pool are:
Flexible Budget Variance
A. $1,600,000 $400,000U
B. $2,500,000 $490,000U
C. $2,590,000 $400,000U
D. $2,900,000 $90,000U
E. $2,990,000 $0

Answer 1

When selecting cost drivers, businesses must consider the impact on the flexible budget and variances, factoring in both fixed and variable costs, as well as external factors like union negotiations affecting labor costs.

Step-by-step explanation:

When the SanBox Company considers choosing new cost drivers for its accounting system, it is essential to understand how different drivers can impact the flexible budget and resulting variances. The scenario provided examines the impact of changes in labor costs due to union negotiations on the total cost of production. For example, if the wage rate increases from $16 to $20 per hour, the choice between using more labor hours or more machines becomes cost-neutral, emphasizing the consideration of factors beyond costs, such as the risk of strikes and market effects of differing production methods.

Total costs in a business context are calculated by adding fixed costs and variable costs. For instance, a barber shop has fixed costs for space and equipment and variable costs based on the hiring of barbers. As output (number of haircuts) increases with additional barbers, variable costs rise in proportion to the labor hired, impacting the overall total costs.