Question

Amethyst has a standard variable overhead rate of $5 per direct labour hour. The standard quantity of direct labour per unit of production is 2 hours. The company's static budget was based on 50,000 units. Actual results for the year are as follows. Actual units produced 45,000 Actual direct labour hours 100,000 Actual variable overhead $495,000 The time has come for the company to compare of actual results with planned results.

Required a) What is the company’s (i) static budget and (ii) flexible budget for the variable overhead costs?

b) What is the company’s variable overhead costs’ (i) spending variance and (ii) efficiency variance?

c) Regarding the company’s actual results, flexible budget, and static budget, does having a small static-budget variance always implies a good budgeting process? Use your calculations to support your argument.

Answer 1

Answer a

Answer b

Answer c

When the actual activity level is different from the Static budget activity then the static budget does not become useful for analyzing the variance.

In the given question there is quite a difference in the volume of actual results and the static budget.

Since the actual units produced are lower that’s why static budget variance is favorable.

For the purpose of taking the corrective actions for the variance, a Flexible budget is useful.

Variable overhead variance:

Total Variable overhead variance = $45000 unfavourable