Question

Lantern Corporation recently prepared a manufacturing cost budget for an output of 50,000 units, as follows:

Direct materials $100,000

Direct labor 50,000

Variable overhead 75,000

Fixed overhead 100,000

Actual units produced amounted to 60,000. Actual costs incurred were: direct materials, $110,000; direct labor, $60,000; variable overhead, $100,000; and fixed overhead, $97,000. If Lantern evaluated performance by the use of a flexible budget, a performance report would reveal a total variance of:

A. $3,000 favorable.

B. $23,000 favorable.

C. $27,000 unfavorable.

D. $42,000 unfavorable.

E. none of the above amounts.

Answer 1

The flexible budget for Lantern Corporation's 60,000 units of production should be $370,000. Actual costs were $367,000, which implies that the total variance is $3,000 favorable. Therefore, the correct answer is A. $3,000 favorable.

Step-by-step explanation:

To determine the total variance, we will first create a flexible budget based on actual production and then compare it to actual costs. Here's how you do it:

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The flexible budget for production of 60,000 units will show that the company should have incurred:

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The total of these figures is $370,000. The actual cost incurred was $110,000 + $60,000 + $100,000 + $97,000 = $367,000. Subtract the actual costs from the flexible budget to find the total variance:

Variance = $370,000 (Flexible Budget) - $367,000 (Actual Costs) = $3,000

Since the actual costs were less than the flexible budget, the variance is favorable. Therefore, the correct answer is A. $3,000 favorable.