Question

Gibson Medical Equipment Company makes a blood pressure measuring kit. Jason McCoy is the production manager. The production department’s static budget and actual results for 2019 follow:

	Static Budget					Actual Results
Production in units	32,000 kits					33,900 kits
Direct materials		$	208,000				$	257,550
Direct labor			176,000					180,950
Variable manufacturing overhead			48,000					54,450
Total variable costs			432,000					492,950
Fixed manufacturing overhead			218,000					213,900
Total manufacturing cost		$	650,000				$	706,850

Required

a. Convert the static budget into a flexible budget.

b. Calculate the variances.

Convert the static budget into a flexible budget. (Do not round intermediate calculations.)

	Flexible Budget Production in units 33,900 Kits Direct materials Direct labor Variable manufacturing overhead Total variable costs $0 Fixed manufacturing overhead 218,000 Total manufacturing costs $218,000

Calculate the variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

	Variances Direct materials Direct labor Variable manufacturing overhead Total variable costs Fixed manufacturing overhead Total manufacturing costs

Answer 1

Since revenues and variable costs vary directly with number of units, we need to calculate budgeted material and labor costs per unit by dividing static budget amounts by 32,000 budgeted units. This gives material cost per unit of $6.50, labor cost per unit of $5.50 per unit and variable manufacturing overhead of $1.50 per unit. These figures are then multiplied by actual units sold i.e. 33,900 units to obtain flexible budget revenue and variable costs.

The fixed costs are constant and remain same in both static and flexed budgets.

a. Flexible Budget

Gibson Medical Equipment Company
Flexible Budget
Particulars	Budgeted Results
Production in units	33,900 Kits
Variable Costs:
Direct Materials	$220,350
Direct Labor	$186,450
Variable Manufacturing Overhead	$50,850
Total Variable Costs	$457,650
Fixed Manufacturing Overhead	$213,900
Total Manufacturing Overhead Cost	$671,550

b. Computation of Variance

The next step is to subtract flexible budget amounts from actual figures to obtain the required variances.

Gibson Medical Equipment Company
Flexible Budget
Particulars	Actual	Budgeted	Variance
Production in units	33,900 Kits	33,900 Kits
Variable Costs:
Direct Materials	$257,550	$220,350	$37,200	U
Direct Labor	$180,950	$186,450	$5,500	F
Variable Manufacturing Overhead	$54,450	$50,850	$3,600	U
Total Variable Costs	$492,950	$457,650	$35,300	U
Fixed Manufacturing Overhead	$213,900	$218,000	$4,100	F
Total Manufacturing Overhead Cost	$706,850	$671,550	$31,200	U