Question

Dodge Hall 2 ply company produces a number of products, including 2 ply toilet paper. The firm, which began operations at the beginning of the current year, uses a standard cost system. The standard costs for one of its industrial paper rolls are provided below:

Direct material (0.5 yd. @ $1.00)	$	0.50
Direct labor (1 hr. @ $10.00)		10.00
Variable overhead (1 hr. @ $1.00)		1.00
Fixed overhead (1 hr. @ $0.50)		.50
	$	12.00

The $0.50 fixed overhead rate is based on total budgeted fixed overhead costs of $17,000. There were no changes in any inventory accounts during the period. The company produced and sold 35,000 units at the following costs:

Direct materials (18,000 yds.)	$	17,280
Direct labor (36,000 hrs.)		374,400
Variable factory overhead		34,500
Fixed factory overhead		15,000

Required:

1. 1) Compute and label as Favorable (F) or Unfavorable (U) the following flexible budget variances (4 points each):

a)	Direct materials price variance
b)	Direct materials usage variance
c)	Fixed overhead spending variance

2) In general, why do companies calculate

a) Volume Variance

b) Flexible Budget Variance

What is potentially misleading about only comparing the master budget to actuals (8 points)?

Answer 1

1. (a)Actual price of material = 17,280 / 18,000 = $0.96

Direct material price variance = (Actual price - Standarad price) x Actual Quantity

= (0.96 - 1) x 35,000

= 1,400 F

(b) Direct material usage variance = (Actual quantity - Standard Quantity) x Standard price

= [18,000 - (35,000 x 0.50)] x 1

= 500 U

(c) Fixed overhead spending variance = Actual fixed overhead - Budgeted fixed overhead

= 15,000 - 17,000

= 2,000 U

2. (a) Volume variance helps to determine whether we can produce in enough quantities to run at a profit

(b) Flexible budget variances are used to determine any shortcomings in actual performance during a given period. It allows a business to see more variances than a static budget, such as the difference between estimated and actual sales and estimated and actual operating costs.

(c) While preparing a master budget, employees might estimate low sales and high expenses so that they can achieve set targets and earn compensation. A master budget is highly rigid. The assumptions set during the year for preparing master budget may not actually come true during the year, causing high amount of variances.