Question

1. The Master (Static) budget for Jack Daniels Inc. is presented below. For June, Jack Daniels Inc. manufactured and sold 920 units for $835. During this month the company incurred $460,000 total variable expenses and $180,000 total fixed expenses.
   1. Required
      1. Prepare a flexible budget performance report for June including all variances.

         Master (Static) Budget

Units	1,000
Sales	$800,000
Variable costs	450,000
Contribution margin	$350,000
Fixed costs	150,000
Operating income	$200,000

2. Jack Daniels Inc. used 3,450 pounds of aluminum in June to manufacture 920 units. The company paid $28.50 per pound during the month to purchase aluminum. On June 1, the company had 50 pounds of aluminum on hand. At the end of June, the company had only 30 pounds of aluminum in its warehouse. Daniels used 4,340 direct labor hours in June, at an average cost of $41.50 per hour.  The standard for aluminum is 4 pounds per unit at a standard cost of $25.00 per pound. The standard for direct labor is 5 hours per unit at a standard rate of $40 per hour.
   1. Compute for June, Jack Daniels Inc.
      1. Purchase price variance for aluminum
      2. Direct labor rate and efficiency variance
   2. Daniels deployed new strategies for both aluminum and labor. For aluminum and labor they invested in better inputs. Did management make good decisions?

Answer 1

Standard Quantity of Aluminium fro actual production = 920 units @ 4 pounds i.e. 3,680 pounds

Actual Quantity of Aluminium used for actual Production = 3,450 pounds

Aluminium purchased = 3,450 - 30 + 50 i.e. 3,430 pounds

Standard Rate = $25 per pound

Actual Rate = $28.50

Purchase price variance = (Standard Price - Actual Price) * Quantity Purchased

= ($25 - $28.50) * 3,430 pounds

= -$12,005 i.e. $12,005 (U)

Standard Hours for actual production = 920 units @ 5 hours i.e. 4,600 hours

Actual Hours for Actual Production = 4,340 hours

Standard Rate = $40 per hour

Actual Rate = $41.50 per hour

Direct Labor Rate Variance = (Standard Rate - Actual rate) * Actual Working Hours

= ($40 - $41.50) * 4,340 hours

= -$6,510 i.e. $6,510 (U)

Labor Efficiency Variance = (Standard Hours - Actual Working Hours) * Standard Rate

= (4,600 - 4,340) * $40

= $10,400 (F)

The management did not make a good decision. Because the inputs for aluminium and labor are already working better than the standards of flexible budget. However, the cost of the inputs is going beyond the standards for which the management should devise a strategy to obtain the inputs at standard prices.