Question

Use the following information to answer questions 42 to 44:

The following summary data are from a performance report for CDE Ltd for June, during which 11,000 units were produced. Budgeted production was 10,000 units.

	Budget (10,000 units)	Actual Costs (11,000 units)	Variances
Raw materials	$200 000	$208 800	$8 800 A
Direct labour	$70 000	$71 000	$1 000 A
Factory fixed overhead	$24 000	$24 200	$200 A
	$294 000	$304 000	$10 000 A

1. The performance report shows overspending (adverse /unfavourable variance) of $10,000. Senior management (with no accounting background) is not impressed with the performance reflected in this report. Why might the factory manager under evaluation question the accuracy of the report above?
2. Revise the performance report using flexible budgeting.
3. Comment on the performance of the factory manager based on your revised report

Answer 1

A.
The senior management is just comparing the actual costs with budgeted costs.
The factor manager might be concerned about the report because the actual units produced are higher than budgeted units and thus the actual total costs could be higher.
B.
Performance report using flexible budgeting
Raw material per unit	$20.00	200000/10000
Direct labour per unit	$7.00	70000/10000
Flexible budgeting is shown below
	Flexible budget	Actual costs	Variances
Units	11000	11000
Raw materials (11,000*20)	$220,000	$208,800	$11,200	F
Direct Labour (11,000*7)	$77,000	$71,000	$6,000	F
Factory fixed overhead	$24,000	$24,200	$200	U
	$321,000	$304,000	$17,000	F
C.
Based on revised performance report the variance was $17,000 favourable indicating under spending.
Factory managers performance was therefore good in controlling the actual costs where direct material and direct labour actual spent was lower than budgeted costs.
Factory manager was able to control costs and thus this created favourable total costs vaiance.