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

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

Step-by-step 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.