Question

Purpose Ltd manufactures and sells plastic storage containers through associated retail outlets throughout Australia. To compete more effectively it has recently introduced a budgetary control system to assist with planning and control of operations. Detailed below is the original static budget set at the start of the month, actual performance figures and the flexed budget for their most popular storage container sold for the month of December 2018,

BUDGET (static) ACTUAL FLEXED

Output (production and sales) 3000 Units 4,500 Units 4,500 Units $ $ $

Sales $45,000 $65,250                        $67,500

                                                3000 @ $15                              4500 @ $14.50             4,500@ $15

Raw Materials. ($18,000)                                  ($25,200)                      ($27,000)

36,000 units                              56000 units                   54,000 units    

  @50c p u                                  @45c p u                      @50c p u

Labor ($6000)                                    ($8280)                        ($9,000)

                                                300 hours                                 460 hours                     450 hours

                                                @$20 ph                                   @18 ph                        @$20 ph

Fixed Overheads ($5,000)                                   ($6,900) ($5000)

Operating Profit $16,000 $24,870 $26,500

REQUIRED:

(a) Describe the purpose and benefits of the flexed budget in identifying deviations from planned performance. (limit 80 words)

(b) Based on information above , reconcile the operating profit under a static budget to the actual operating profit breaking down the reconciliation and identifying the following favorable and unfavorable variances:

• Sales Volume Variance

• Sales Price Variance

• Materials Usage Variance

• Materials Price Variance

• Labor Usage Variance

• Labor Rate Variance

• Fixed Overhead Spend Variance

Show full workings as to how you calculated each of the above variances

(c) Assuming that the budgets above were all accurately set in terms of labor times and rates and material usage and price, suggest one feasible cause for each variance you have identified in (b) from what you know about the company and appreciating the business has produced and sold 50 percent more than initially anticipated under the static budget. As part of your answer focus on explaining why a favorable variance in one area might explain an unfavorable variance in another area – interrelationships and the possible tradeoff between variances in attempting to meet budgeted targets.(140 word limit)

Answer 1

a) A Flexible budget is a budget which compares the actual results with same output at budgeted rates. It helps in like to like comparison and understanding results better and take corrective action. Flexible budget helps in adaptability to business conditions which keeps changing based on external and internal environment. It helps in realistic comparison and helps firm in taking reliable decision to control costs

b)

c)

Variance	Cause
Sales Variance	Sales volume variance is favorable which is offset partly by price variance since price is reduced. Team has tried to achieve sales target by reducing selling price and increasing volume
Sales Volume variance	Market demand higher than forecast
Sales price variance	Reduction of selling price to sell more volume
Material Cost variance	Overall variance is positive due to price variance but offset by Material usage variance which is adverse
Material price variance	Better efficiency shown by purchase department in procuring material for production
Material usage variance	Production department inefficiency in control and usage of material
Labor Cost variance	Overall variance is positive due to better labor rate but offset by labor inefficiency in production
Labor rate variance	Better rates negotiated by HR/Personnel Department
Labor usage variance	Production department inefficiency in deploying labor in production
Fixed Overhead spend variance	Actual overhead is higher may be due to inflation and overspends