Question

Problem 1) Static budget variance and Flexible budget variance

Sonnet Inc. has the following information for March 2018.

Master Budget for March 2018 Sales volume………………………...……………….2,100 diskettes

Average selling price per diskette……………………$5.00/diskette

DM costs per diskette………………………………..$0.85/diskette

DM cost per lb……………………………….$17.00/lb

DM per diskette……………………………..0.05 lb/diskette

Direct Labor:

Direct labor cost per hour……………………..$15.00/hr

# of diskettes produced per labor hour……….. 30 diskettes

Direct Marketing costs………………………………$0.30 /diskette

Fixed overhead costs………………………………..$850/month

Actual for March 2018

Sales volume ………………………………………..1,800 diskettes

Average selling price………………………………..$4,80/diskette

DM costs per diskette………………………………..$0.80/diskette

DM cost per lb……………………………….$20.00/lb

DM per diskette……………………………..0.04 lb/diskette

Direct Labor:

Direct labor cost per hour……………………..$15.00/hr

# of diskettes produced per labor hour……….. 25 diskettes

Direct Marketing costs………………………………$0.30 /diskette

Fixed overhead costs………………………………..$820/month

Required: Compute the following:

1) Static-budget variance for operating income (OI).

2) Flexible-budget variance for sales revenue.

3) Flexible-budget variance for OI.

4) Sales-volume variance for OI.

5) Rate (price) and Efficiency (quantity) variance for direct labor cost.

6) Price and Quantity variance for direct material cost.

Answer 1

Sonnet Inc.
A) Static Budget
Sr.No.	Particulars	Qty	Rate/Unit or hour	Amount
1)	Units to be sold	2,100.00	5.00	10,500.00
2)	Direct Material	105.00	17.00	1,785.00
3)	Direct Labor	70.00	15.00	1,050.00
4)	Direct Marketing Cost		0.30	630.00
5)	Fixed Overhead Cost	-	-	850.00
6)	Total			4,315.00
7)	Net Operating Income (1-6)			6,185.00
B) Flexible Budget
Sr.No.	Particulars	Qty	Rate/Unit or hour	Amount
1)	Units to be sold	1,800.00	5.00	9,000.00
2)	Direct Material	90.00	17.00	1,530.00
3)	Direct Labor	60.00	15.00	900.00
4)	Direct Marketing Cost		0.30	540.00
5)	Fixed Overhead Cost	-	-	850.00
6)	Total			3,820.00
7)	Net Operating Income (1-6)			5,180.00
C) Actual Performance
Sr.No.	Particulars	Qty	Rate/Unit or hour	Amount
1)	Units to be sold	1,800.00	4.80	8,640.00
2)	Direct Material	72.00	20.00	1,440.00
3)	Direct Labor	72.00	15.00	1,080.00
4)	Direct Marketing Cost		0.30	540.00
5)	Fixed Overhead Cost	-	-	820.00
6)	Total			3,880.00
7)	Net Operating Income (1-6)			4,760.00
	Computations of variances -
1)	Static Budget variance for Operating Income (OI)
	(A7 - C7)	= 6185 - 4760		1,425.00	Adverse
2)	Flexible budget variance for sales revenue
	(B1 - C1)	= 9000 - 8640		360.00	Adverse
3)	Flexible budget variance for Operating Income
	(B7 - C7)	= 5180 - 4760		420.00	Adverse
4)	Sales volume variance = Standard Price * (Budgeted Units - Actual Units)
	= 5* (2100 - 1800)
	1500 (Adverse)
5)	Labour Rate Variance
	= Actual Hours * (Standard Rate - Actual Rate)
	= 72*(15-15)
	0 (zero - No variance observed)
6)	Labour Efficiency Variance
	= Standard Rate * (Standard Hours - Actual Hours)
	= 15 * (60-72)
	180 (Adverse)
7)	Price Variance for direct material
	= Actual qty * (Standard Rate - Actual Rate)
	= 72* (17-20)
	216 (Adverse)
8)	Quantity Variance for direct material
	= Standard Rate * (Standard Qty - Actual qty)
	= 17 * (90-72)
	306 (Favourable)