Preparing a flexible budget computing standard cost variance

Morton Recliners manufactures leather recliners and uses flexible budgeting and a

standard cost system. Morton allocates overhead based on yards of direct materials.

The company’s performance report includes the following selected data:

Static Budget Actual Results (1,000 recliners) (980 recliners)

Sale (1,000 recliners \(505 each) \) 505,000 (980 recliners \(480 each) \) 470,400

Variable Manufacturing Costs: Direct Materials (6,000 yds. @ \(8.60/yd.) 51,600 (6,143 yds. @ \)8.40/yd.) 51,601 Direct Labor (10,000 DLHr @ \(9.20/DLHr) 92,000 (9,600 DLHr @ \)9.30/DLHr) 89,280 Variable Overhead (6,000 yds. @ \(5.20/yd.) 31,200 (6,143 yds. @ \)6.60/yd.) 40,544

Fixed Manufacturing Costs: Fixed Overhead 60,600 62,600 Total Cost of Goods Sold 235,400 244,025

Gross Profit \( 269,600 \) 226,375

Requirements

1. Prepare a flexible budget based on the actual number of recliners sold.

2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost,variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.

3. Have Morton’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?

4. Describe how Morton’s managers can benefit from the standard cost system.

Budgeting is the practice of planning for the future. This procedure aids managers in planning for the future and maintaining control over the organization's operations.

Working notes:

Direct material price variance

$\begin{array}{c}\mathbf{Direct}\mathbf{material}\mathbf{Cost}\mathbf{variance}\mathbf{=}\mathbf{Actual}\mathbf{material}\mathbf{\times }\left(\mathrm{Actual}\mathrm{Price}-\mathrm{Standard}\mathrm{Price}\right)\\ \mathbf{=}\mathbf{6}\mathbf{,}\mathbf{143}\mathbf{\times }\left(8.40-8.60\right)\\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{228}\mathbf{.}\mathbf{60}\mathbf{Favourable}\end{array}$Direct material efficiency variance

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{m}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{f}\mathbf{f}\mathbf{i}\mathbf{c}\mathbf{i}\mathbf{e}\mathbf{n}\mathbf{c}\mathbf{y}\mathbf{v}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{=}\mathbf{S}\mathbf{t}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{a}\mathbf{r}\mathbf{d}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\left(Actualunits-Standardunit\right)\\ \mathbf{=}\mathbf{\$}\mathbf{8}\mathbf{.}\mathbf{60}\mathbf{\times }\left(6,143-\frac{6,000}{1,000}\times 980\right)\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{261}\mathbf{.}\mathbf{80}\mathbf{U}\mathbf{n}\mathbf{f}\mathbf{a}\mathbf{v}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\end{array}$

Labor price variance

$\begin{array}{c}\mathbf{L}\mathbf{a}\mathbf{b}\mathbf{o}\mathbf{r}\mathbf{p}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{v}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{=}\mathbf{A}\mathbf{c}\mathbf{t}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{h}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{s}\mathbf{\times }\left(Actualrateperhour-Standardrateperhour\right)\\ \mathbf{=}\mathbf{9}\mathbf{,}\mathbf{600}\mathbf{\times }\left(\$9.30-\$9.20\right)\\ \mathbf{=}\mathbf{960}\mathbf{U}\mathbf{n}\mathbf{f}\mathbf{a}\mathbf{v}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\end{array}$

Labor efficiency variance

$\begin{array}{c}\mathbf{L}\mathbf{a}\mathbf{b}\mathbf{o}\mathbf{r}\mathbf{e}\mathbf{f}\mathbf{f}\mathbf{i}\mathbf{c}\mathbf{i}\mathbf{e}\mathbf{n}\mathbf{c}\mathbf{y}\mathbf{v}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{=}\mathbf{S}\mathbf{t}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{a}\mathbf{r}\mathbf{d}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{\times }\left(Actualhours-Standardhours\right)\\ \mathbf{=}\mathbf{9}\mathbf{.}\mathbf{3}\mathbf{\times }\left(9,600-\frac{10,000}{1,000}\times 980\right)\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{860}\mathbf{F}\mathbf{a}\mathbf{v}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\end{array}$

Variable overhead spending variance

$\begin{array}{c}\mathbf{Variable}\mathbf{overhead}\mathbf{spending}\mathbf{variance}\mathbf{=}\mathbf{Actual}\mathbf{material}\mathbf{\times }\left(\mathrm{Actual}\mathrm{variable}\mathrm{overhead}-\mathrm{Standard}\mathrm{variable}\mathrm{overhead}\right)\\ \mathbf{=}\mathbf{6}\mathbf{,}\mathbf{143}\left(\$6.60-\$5.20\right)\\ \mathbf{=}\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{600}\mathbf{Unfavourable}\end{array}$

Variable overhead efficiency

$\begin{array}{c}\mathbf{Variable}\mathbf{overhead}\mathbf{efficiency}\mathbf{variance}\mathbf{=}\mathbf{Standard}\mathbf{variable}\mathbf{\text{\hspace{0.33em}}}\mathbf{overhead}\mathbf{rate}\mathbf{\times }\left(\mathrm{Actual}\mathrm{units}-\mathrm{Standard}\mathrm{units}\right)\\ \mathbf{=}\mathbf{5}\mathbf{.}\mathbf{20}\mathbf{\times }\left(6,143-\frac{6,000}{1,000}\times 980\right)\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{367}\mathbf{.}\mathbf{60}\mathbf{UNfavourable}\end{array}$

Fixed overhead spending variance

$\begin{array}{c}\mathbf{Fixed}\mathbf{overhead}\mathbf{spending}\mathbf{variance}\mathbf{=}\mathbf{Actual}\mathbf{fixed}\mathbf{overhead}\mathbf{-}\mathbf{Budgeted}\mathbf{fixed}\mathbf{overhead}\\ \mathbf{=}\mathbf{62}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{60}\mathbf{,}\mathbf{600}\\ \mathbf{=}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{Unfavourable}\end{array}$

Fixed overhead volume variance

$\begin{array}{c}\mathbf{F}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{o}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{h}\mathbf{e}\mathbf{a}\mathbf{d}\mathbf{v}\mathbf{o}\mathbf{l}\mathbf{u}\mathbf{m}\mathbf{e}\mathbf{v}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{=}\mathbf{B}\mathbf{u}\mathbf{d}\mathbf{g}\mathbf{e}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{\text{\hspace{0.17em}}}\mathbf{f}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{o}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{h}\mathbf{e}\mathbf{a}\mathbf{d}\mathbf{-}\mathbf{A}\mathbf{p}\mathbf{p}\mathbf{l}\mathbf{i}\mathbf{e}\mathbf{d}\mathbf{\text{\hspace{0.33em}}}\mathbf{f}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{o}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{h}\mathbf{e}\mathbf{a}\mathbf{d}\mathbf{a}\\ \mathbf{=}\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{-}\left(\frac{60,000}{1,000}\right)\mathbf{\times }\mathbf{980}\\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{200}\mathbf{\text{\hspace{0.33em}}}\mathbf{U}\mathbf{n}\mathbf{f}\mathbf{a}\mathbf{v}\mathbf{o}\mathbf{u}\mathbf{r}\mathbf{a}\mathbf{b}\mathbf{l}\mathbf{e}\end{array}$

When the actual charges exceed the average, Morton managers have not done an excellent job of expense control. Those are not good. There are just two favorable variations: material price and labor efficiency. The managers did not make efficient use of variable overhead. Management of overhead expenses may have been improved.

Managers can evaluate performance based on conventional costing and, if necessary, improve performance. The manager is informed of the target level using standard costing. Managers can reduce cost levels based on the target level.