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the following budgeted figures have been taken from the cost records of MZ ltd: production units...

the following budgeted figures have been taken from the cost records of MZ ltd:

production units 10 000 12 500
capacity level 80% 100%
sales R1 144 000 R1 430 000
direct material @R5 per KG R200 000 R250 000
direct labour @R20 per hour R240 000 R300 000
factory overheads R300 000 R330 000
selling and administrative expenses R180 000 R190 000

normal capacity is equal to 12 500 units. As a result of poor economic conditions the budget for July 2019 has been set at 80%of normal capacity

the company uses the direct costing method for internal reporting purposes the following variance report for July 2019 has been presented to management

fixed budget actual budget variance
production units 10 000 9000
material usage (kg) 10 000 9000
labour hours 12 000 11 500
sales R1 144 000 R1 003 200 R140 800 (a)
material R200 000 R188 000 R12 000 (f)
direct labour R240 000 R224 000 R16 000 (f)
factory overhead R300 000 R296 000 R4 000 (f)
selling and administrative expenses R180 000 R176 000 R4 000 (f)
net profit R224 000 R119 000 R104 800 (a)

(A) prepare an alternative variance report for the department that would be more meaningful to management

(B) critically discuss the format and content of the variance report for July 2019 a represented to the department

Solutions

Expert Solution

a] A more meaningful report would be a comparison for fixed budget with flexible budget to find the activity variances
and a comparison of the flexible budget with the actuals to give the revenue and spending variances.
Fixed Budget Activity Variance Flexible Budget Revenue/Spending Variance Actuals
Production in units 10000 9000 9000
Material usage [kg] 10000 9000 9000
Labor hours 12000 10800 11500
Sales $    11,44,000 $       1,14,400 U 1029600 26400 U 1003200
Variable expenses: `
Material $       2,00,000 $           20,000 F 180000 8000 U 188000
Direct labor $       2,40,000 $           24,000 F 216000 8000 U 224000
Total variable expenses $       4,40,000 $           44,000 F 396000 16000 U 412000
Contribution margin $       7,04,000 $           70,400 U 633600 42400 U 591200
Fixed expenses:
Factory overhead $       3,00,000 $                    -   N 300000 4000 F 296000
Selling and administrative expenses $       1,80,000 $                    -   N 180000 4000 F 176000
Total fixed expenses $       4,80,000 $                    -   N 480000 8000 F 472000
Net profit $       2,24,000 $           70,400 U 153600 34400 U 119200
b] The performance has been unsatisfactory as the revenue/spending variances are all unfavorable, except for the fixed
expenses variances which are favorable.

jeff jeffy answered 3 weeks ago
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