Question

You're the controller at X Corp. Your accounting staff has just provided you with a list of variance calculations that you requested. Unfortunately, they forgot to calculate some variances that you wanted, and even worse, they neglected to provide you with the original budget data that you also requested. It's 8 PM, and everyone has gone home already. You have an actual income statement and have scrounged your desk to find some information on standards that the company used in developing the budget. You need to prepare a presentation for tomorrow morning and don't want to admit that you can't find your own budget. You resolve to reconstruct it.

Variances								Income Statement
Materials price variance	6,000 U						Revenue		$450,000
Labor efficiency variance	4,000 F						(100,000 units sold)
Maintenance variance	2,000 U
Supervision variance	5,000 F						Materials		120,000
Industry volume variance	10,000 F						(30,000 lbs.)
Sales mix variance	8,000 U						Direct labor		70,000
							(3,200 hours)
							Maintenance		80,000
Standards							Supervision		50,000
							Depreciation		60,000
Sales price	$4.25 / unit
Materials usage	0.33 lbs / unit						Total expenses		380,000
Direct labor wage	$20 / hour						Net income		70,000

/.

Depreciation and supervision are fixed costs; the others are variable. Depreciation was known with certainty at the time of budgeting for all pre-existing PP&E. The company bought a new machine during the year that added an unexpected $4,000 to depreciation. The company’s market share for the year was 1%, but had been budgeted to be 1.2%.

a) Reconstruct the original budgeted income statement.

b) The purpose of tomorrow's meeting is to discuss your strategy for variance investigation. Your staff is small, and you can only adequately investigate two variances. Which two will you pick, and why? Note that you are in no way constrained by the selection of variances provided above by your staff. You can choose any variance to investigate, after you have calculated it. Please keep your explanations brief.

Answer 1

a)	COMPUTATION OF BUDGTED INCOME STATEMENT
	Here we will compute budget cost by taking one by one cost
1	Material:
	Actual Qty=	30000
	Actual cost=	120000
	cost per lbs	4
	Budgted qty usage	0.33 lbs/unit
	standard qty = 100000*.33	33000
	material price variance = AQ* (SP-AP)	.+ 30000* (sp-4) = -6000
		sp= 3.8			0.2
	Standard cost =	125400
2	DIRECT LABOUR
	Actual Labour=	3200
	Actual cost=	70000
	cost per hour	21.875
	Standard labour cost per hour	20
	Labour efficiency usage= SR * (SH-AH)	.+20*(SH-3200) = 4000
		SH = 3400
	Standard labour cost	68000
3	BUDGTED SALES
	Actual QTY sold	100000
	revenue	450000
	selling price per unit`	4.5
	budgted selling price per unit	4.25
	Sales mix variance= BP * (BQ-AQ)	.+4.25*(BQ-100000) = -8000
		BQ= 98118
	Budgted sales = 98118*4.25	417001.5
	BUDGTED INCOME STATEMENT
	PARTIUCLARS	AMOUNT
	REVENUE	417000
	MATERIAL	125400
	LABOUR	68000
	MAINTENANCE = 80000-2000	78000
	SUPERVISION = 50000+5000	55000
	DEPRECIATION = 60000-4000	56000
	TOTAL EXPENSES	382400
	BUDGTED PROFIT	34600
b)	I will select material and labour variances here. Because it will cover entire major portion in the organisation
	In the material variance
	material price variance = 6000 unfavourable
	materail usage variance = SP * (SQ-AQ) = 3.8 * (33000-3000) = 11400 favourable
	even though price variance is showing unfavourable usage variance has favourable difference only.
	in the labour variance
	Labour efficiency usage = 4000 favourable
	Labour rate variance = AH* (SR-AR) = 3200* (20-21.875) = 6000 UNFAVOURABLE
	even though efficiency variance is showing unfavourable price variance has favourable difference only.