Question

The following is total monthly budgeted cost and activity information for the four activity centers in the billing department of Oregon Power Company:

Activity Center	Variable	Fixed	Cost Driver
Statement inquiry	$79,200	$156,000	3,200 labor hours
Correspondence	$9,639	$22,000	2,700 letters
Account billing	$144,000	$77,000	2,400,000 lines
Payment verification	$12,095	$80,000	20,500 accounts

In September, actual total costs and activity were as follows:

Activity Center	Total Costs	Driver Amount
Statement inquiry	$234,023	3,140 labor hours
Correspondence	$31,154	2,550 letters
Account billing	$231,898	2,580,000 lines
Payment verification	$92,876	20,630 accounts

Required
Compute the flexible-budget variances for the following two activity cost items (round unit costs to two decimal places and enter favorable variances as positive numbers and unfavorable variances as negative numbers):

  Correspondence :

  Statement inquiry :

Answer 1

Total budgeted variable cost for statement inquiry = $ 79200

Cost driver for statement inquiry is labor hours and budgeted labor hours for statement inquiry = 3200 labor hours

Budgeted Statement inquiry variable cost per labor hour

= Variable cost / labor hours

     = $ 79200 /3200 labor hours = $ 24.75 per hour

Budgeted fixed cost for statement inquiry = $ 156000

Fixed cost will remain unchanged for a relevant range of activity. There is nothing mentioning about relevant range or normal capacity change. So, it is assumed that still the operation will be in the relevant range. So fixed cost will remain unchanged.

Actual labor hours incurred for statement inquiry= 3140 labor hours

Flexible budget cost for statement inquiry

   = (Actual labor hours * budgeted variable cost per unit) + Budgeted fixed cost

   = (3140 hours * $ 24.75 per hour ) + $ 156000 = $ 233715

Actual cost for statement inquiry = $ 234023

Flexible budget variance for statement inquiry = Actual cost – Flexible budget cost

    = $ 234023 - $ 233715 = - $ 308

Flexible budget variance for statement inquiry is unfavorable because actual cost is greater than the flexible budget cost.

Total budgeted variable cost for Correspondence = $ 9639

Cost driver for Correspondence is letters and budgeted number of letters for Correspondence = 2700 letters

Budgeted Correspondence variable cost per labor hour

= Variable cost / Budgeted number of letters

= $ 9639/2700 letters = $ 3.57 per letter

Budgeted fixed cost for Correspondence = $ 22000

Fixed cost will remain unchanged for a relevant range of activity. There is nothing mentioning about relevant range or normal capacity change. So, it is assumed that still the operation will be in the relevant range. So, fixed cost will remain constant.

Actual activity of letters in September = 2550 letters

Flexible budget cost for Correspondence

   = (Actual Activity * budgeted variable cost per unit) + Budgeted fixed cost

= (2550 letters * $ 3.57 per letter ) + $ 22000 = $ 31103.5

Actual cost for Correspondence for September = $ 31154

Flexible budget variance for Correspondence = Actual cost – Flexible budget cost

= $ 31154 - $ 31103.5 = - $ 50.5

Flexible budget variance for Correspondence is unfavorable because actual cost is greater than the flexible budget cost.

Flexible budget

Activity center	Actual total cost	Flexible budget cost	Flexible budget variance (Actual – flexible)
Correspondence	$ 31154	$ 31103.5	- $ 50.5
Statement inquiry	$ 234023	$ 233715	- $ 308