Question

8-27 Basic Flexible Budget The budgeted prices for materials and direct labor per unit of fi nished product are $8 and $7, respectively. The production manager is delighted about the following data: Static Budget Actual Costs Variance Direct materials $59,200 $49,900 $9,300 F Direct labor 51,800 39,200 12,600 F Is the manager’s happiness justifi ed? Prepare a report that might provide a more detailed explanation of why the static budget was not achieved. Good output was 5,300 units.

Answer 1

Basic Flexible Budget

Flexible Budget:

Differential Analysis

Reject Order (Alt. 1) or Accept Order (Alt. 2)

September 5

Flexible Actual Variance

Costs: 5,300 units 5,300 units 0

Direct Materials $42,400 $49,900 $7,500 U

Direct Labor $ 37,100 $39,200 $2,100 U

Total Variable costs $79,500 $89,100 $9,600 U

Step-by-step explanation:

Using the good output and a flexible budget, the static budget was not achieved favorably as depicted.

A flexible budget varies the budgeted units to agree with the volume of activity. This produces a different result from the static budget, which does not vary the budgeted units according to the volume of activity.

A flexible budget is preferable as it reflects the correct performance given the activity level or volume of production or sales.