Question

Pacific company provides the following information about its budgeted and actual results for June 2019. Although the expected June volume was 25, 000 units produced and sold, the company actually produced and sold 27, 000 units as detailed here:

	Budgeted (25, 000 units)	Actual (27, 000 units)
Selling price	$5.00 per unit	$5.23 per unit
Variable costs (per unit): Direct materials	1.24 per unit	1.12 per unit
Direct labour	1.50 per unit	1.40 per unit
Manufacturing supplies*	0.25 per unit	0.37 per unit
Utilities*	0.50 per unit	0.60 per unit
Selling costs	0.40 per unit	0.34 per unit
Fixed cost (per month) Depreciation –machinery*	$3, 750	$3, 710
Depreciation –building*	2, 500	2, 500
General liability insurance	1, 200	1,250
Property taxes on office equipment	500	485
Other administrative expenses	750	900

*Indicates factory overhead items:0.75 per unit or $3 per direct labour hour for variable overhead, and 0.25 per unit or $1 per direct labour hour for fixed overhead.

Standard costs based on expected output of 25, 000 units

	Per unit of output	Quantity to be used	Total cost
Direct materials, 4 oz.@$0.31/oz.	$1.24/unit	100,000oz.	$31, 000
Direct labour, 0.25hrs @$6.00/hr.	1.50/unit	6,250 hrs	37, 500
Overhead	1.00/unit		25, 000

Actual cost incurred to produce 27, 000 units

	Per unit of output	Quantity to be used	Total cost
Direct materials, 4 oz. @$0.28/oz.	$1.12/unit	108,000oz.	$30, 240
Direct labour, 0.20hrs @$7.00/hr.	1.40/unit	5,400 hrs	37, 800
Overhead	1.20/unit		32, 400

Standard costs based on expected output of 27, 000 units

	Per unit of output	Quantity to be used	Total cost
Direct materials, 4 oz.@$0.31/oz.	$1.24/unit	108,000oz.	$33, 480
Direct labour, 0.20hrs @$6.00/hr.	1.50/unit	6, 750 hrs	40, 500
Overhead			26, 500

Required

1. Prepare June flexible budgets showing expected sales, costs, and net income assuming 20, 000, 25, 000 and 30, 000 units of output produced and sold.

2. Prepare a flexible budget performance report that compares actual results with the amounts budgeted if the actual volume had been expected.

3. Apply variance analysis for direct materials and direct labour.

4. Compute the total overhead variance, and the controllable and volume variances.

5. Compute spending and efficiency variances for overhead.

6. Prepare journal entries to record standard costs, and price and quantity variances, for direct materials, direct labour, and factory overhead.

Answer 1

	Budgeted	Budgeted	Budgeted	Budgeted
	Per unit	(20, 000 units)	(25, 000 units)	(30, 000 units)
Selling price	$        5.00	$ 100,000.00	$ 125,000.00	$ 150,000.00
Variable costs (per unit):
Direct materials	$        1.24	$   24,800.00	$    31,000.00	$     37,200.00
Direct labour	$        1.50	$   30,000.00	$    37,500.00	$     45,000.00
Manufacturing supplies*	$        0.25	$     5,000.00	$      6,250.00	$       7,500.00
Utilities*	$        0.50	$   10,000.00	$    12,500.00	$     15,000.00
Selling costs	$        0.40	$     8,000.00	$    10,000.00	$     12,000.00
Total Variable costs		$   77,800.00	$    97,250.00	$ 116,700.00
Contribution Margin		$   22,200.00	$    27,750.00	$     33,300.00
Fixed cost (per month)		$         3,750.00	$          3,750.00	$          3,750.00
Depreciation –machinery*
Depreciation –building*		$         2,500.00	$          2,500.00	$          2,500.00
General liability insurance		$         1,200.00	$          1,200.00	$          1,200.00
Property taxes on office equipment		$            500.00	$             500.00	$              500.00
Other administrative expenses		$            750.00	$             750.00	$              750.00
Total Fixed costs		$         8,700.00	$          8,700.00	$          8,700.00
Operating Income		$       13,500.00	$        19,050.00	$        24,600.00

Fixed Costs remains same for all level of output,
Other costs are calculated as Per unit cost x No of units

	Budgeted	Budgeted	Actual	Actual	Variance
	Per unit	(27, 000 units)	Per unit	(27, 000 units)
Selling price	$        5.00	$ 135,000.00	$                  5.23	$ 141,210.00	$   6,210.00
Variable costs (per unit):
Direct materials	$        1.24	$   33,480.00	$                  1.12	$     30,240.00	$ (3,240.00)
Direct labour	$        1.50	$   40,500.00	$                  1.40	$     37,800.00	$ (2,700.00)
Manufacturing supplies*	$        0.25	$     6,750.00	$                  0.37	$       9,990.00	$   3,240.00
Utilities*	$        0.50	$   13,500.00	$                  0.60	$     16,200.00	$   2,700.00
Selling costs	$        0.40	$   10,800.00	$                  0.34	$       9,180.00	$ (1,620.00)
Total Variable costs		$ 105,030.00		$ 103,410.00	$ (1,620.00)
Contribution Margin		$   29,970.00		$     37,800.00	$   7,830.00
Fixed cost (per month)
Depreciation –machinery*		$         3,750.00		$          3,710.00	$       (40.00)
Depreciation –building*		$         2,500.00		$          2,500.00	$               -
General liability insurance		$         1,200.00		$          1,250.00	$         50.00
Property taxes on office equipment		$            500.00		$              485.00	$       (15.00)
Other administrative expenses		$            750.00		$              900.00	$      150.00
Total Fixed costs		$         8,700.00		$          8,845.00	$      145.00
Operating Income		$       21,270.00		$        28,955.00	$   7,685.00

Variance is Actual - Budgeted.