In: Finance
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
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. |