FLEXIBLE

BUDGET
Annie Rose Perez
Nicholson Demalata
Christopher Garcia
Maureen Ilagan
Joanna Rose L. Vasquez
 . .

. .
.

VARIANCE ANALYSIS
CYCLE
- Quantitative investigation of the difference between actual
result and budgeted/planned.

– a management system that compares actual results to a

budget so that significant deviations can be flagged as
exceptions and investigated further.
– refer to a company’s projected revenue, cost or
expenses.

– refers to a projected amount per unit of product, per unit

of input/output
Variance Analysis Cycle
Identify Root
Causes

Raise Questions Take Actions

Analyze Conduct next

Variances period’s
operations

Prepare Performance
Report Begin
 Prepare Performance Report
Rick’s Hairstyling
Planning Budget
For the month ended August 2018
Budgeted client-visits 1,000.00
Revenue 180,000.00
Expenses:
Wages and Salaries 102,000.00
Hairstyling Supplies 1,500.00
Client Gratuites 4,100.00
Electricity 1,600.00
Rent 28,500.00
Liability Insurance 2,800.00
Employee Health insurance 21,300.00
Miscellaneous 1,400.00
Total Expense 163,200.00

Net Operating Income 16,800.00

 Analyze Variances
Rick’s Hairstyling
For the month ended August 2018
Actual Results Planning Budget
Budgeted client-visits 1,100.00 1,000.00
Revenue 194,200.00 180,000.00
Expenses:
Wages and Salaries 106,900.00 102,000.00
Hairstyling Supplies 1,620.00 1,500.00
Client Gratuites 6,870.00 4,100.00
Electricity 1,550.00 1,600.00
Rent 28,500.00 28,500.00
Liability Insurance 2,800.00 2,800.00
Employee Health insurance 22,600.00 21,300.00
Miscellaneous 2,130.00 1,400.00
Total Expense 172,970.00 163,200.00
Net Operating Income 21,230.00 16,800.00
 Analyze Variances
Rick’s Hairstyling
For the month ended August 2018
Planning Budget Variance
Actual Results
Budgeted client-visits 1,100.00 1,000.00 100.00
Revenue 194,200.00 180,000.00 14,200.00
Expenses:
Wages and Salaries 106,900.00 102,000.00 4,900.00
Hairstyling Supplies 1,620.00 1,500.00 120.00
Client Gratuites 6,870.00 4,100.00 2,770.00
Electricity 1,550.00 1,600.00 -50.00
Rent 28,500.00 28,500.00 -

Liability Insurance 2,800.00 2,800.00 -

Employee Health insurance 22,600.00 21,300.00 1,300.00

Miscellaneous 2,130.00 1,400.00 730.00
Total Expense 172,970.00 163,200.00 9,770.00
Net Operating Income 21,230.00 16,800.00 4,430.00
Raise Questions
• Why did these variance occur?
• What’s the cause of variances?
• Is the variance significant?
IDENTIFY ROOT CAUSE
• Nature of the problem, issue, problem statement
• Fundamental reason for the problem
• Required in order to take preventive corrective
action
 Take Actions
• - a variance of $5 is probably not enough to warrant
attention whereas a variance of $5000 might be worth
tracking down.

• - a variance that is only .1% of spending on an item is

probably caused by random factors. A variance of 10%
spending is much more likely to be a signal that something is
wrong.
 Conduct Next
Period’s Operations

Begin
 FLEXIBLE BUDGET

Flexible Budget Overview

A flexible budget calculates different expenditure levels for variable

costs, depending upon changes in actual revenue. The result is a
budget that varies, depending on the activity levels experienced.
You input the actual revenues or other activity measures into the
flexible budget once an accounting period has been completed,
and it generates a budget that is specific to the inputs.
 Steps for Preparing Flexible Budget

The budget is then compared to actual information for control

purposes. The steps needed to construct a flexible budget are:

• Identify all fixed costs and segregate them in the budget model.

• Determine the extent to which all variable costs change as activity

measures change.
• Create the budget model, where fixed costs are hard coded into
the model, and variable costs are stated as a percentage of the
relevant activity measures or as a cost per unit of activity
measures.

• Enter actual activity measures into the model after an accounting

period has been completed. This updates the variable costs in
the flexible budget.

• Enter the resulting flexible budget for the completed period into
the accounting system for comparison of actual expenses.
Advantages of Flexible Budget
• Adjustment for Predictions

• Adapting Change

• Control and Evaluation

• Inflation and Variance

Disadvantages of Flexible Budget
• Continuous Monitoring

• Inaccurate Adjustments

• Lack of Information

• Complexity
 Characteristics of a Flexible Budget

Planning Budget

A planning Budget is prepared before the period begins and is valid

for only the planned level of activity. A static planning budget is
suitable for planning but is inappropriate for evaluating how costs
are controlled. (See Planning Budget Example)
Flexible Budget

A flexible budget is an estimate of what revenues and costs should

have been, given the actual level of activity for the period. When a
flexible budget is used in performance evaluation, actual costs are
compared to what the costs should have been for the actual level
of activity during the period rather than to the static planning
budget.
 ILLUSTRATION

To illustrate the difference between a static planning and a flexible budget,

consider Rick's Hairstyling. An upscale hairstyling salon that is owned and
managed by RIck Manzi. Recently, Rick has been attempting to get better
control of his revenues and costs, and the urging of his accounting and
business adviser, Victoria Kho, he has begun to prepare monthly budgets.
 At the end of February, Rick prepared the March budget. Rick believes that the number of
customers served in a month (also known as the number client-visits) is the best way to measure the
overall level of activity in his salon. A customer who comes into the salon and has his or her hair
styled is counted as one client-visit.

Rick has identified eight major categories of costs – wages and salaries, hairstyling supplies, client
gratuities (flowers, candies, and glasses of champagne), electricity, rent, liability insurance, employee
health insurance, and miscellaneous.

Working with Victoria Kho - his accounting and business adviser, Rick estimated a cost formula for
each cost. For example, the cost formula for electricity is $1,500 + $0.10q, where q equals the
number of client-visits. In other words, electricity is a mixed cost with a $1,500 fixed element and a
$0.10 per client-visit variable element. Once the budgeted level of activity was set at 1,000 client-
visits, Rick computed the budgeted amount for each line item in the budget. For example, using the
cost formula, he set the budgeted cost for electricity at $1,600 (= $1,500 + $0.10 x 1,000). To finalize
his budget, Rick computed his expected net operating income for March of $16,800. (See Planning
Budget)
 Rick’s Hairstyling
Planning Budget
For the Month Ended March 31

Budgeted client-visits (q)……………………………........... 1,000

Revenue ($180.00q)……………………………………........... $180,000
Expenses:
Wages and salaries ($65,000 + $37.00q)…….......... 102,000
Hairstyling supplies ($1.50q)……………………............ 1,500
Client gratuities ($4.10q)…………………………….......... 4,100
Electricity ($1,500 + $0.10q)……………………….......... 1,600
Rent ($28,500)…………………………………………............ 28,500
Liability Insurance ($2,800)………………………............ 2,800
Employee health insurance ($21,300)………............ 21,300
Miscellaneous ($1,200 + $0.20q)………………........... 1,400
Total Expense………………………………………………........... 163,200
Net operating income………………………………….......... $ 16,800
 At the end of March, Rick prepared the income statement (See Income
Statement) which shows that 1,100 clients actually visited hi salon in March and
that his actual net operating income for the month was $21,230.

The first thing Rick noticed when compairing Planning Budget and Income
Statement is that the actual profit of $21,230 was substantially higher than the
budgeted profit of $16,800. This was, of course, good news, but Rick wanted to
know more. Business was up by 10% - the salon had 1,100 client-visits instead
of the budgeted 1,000 client-visits. Could this alone explain the higher net
operating income? The answer is NO. An increase in net operating income of
10% would have resulted in net operating income of only $18,480 (=1.1 x
$16,800), not the $21,230 actually earned during the month.
 Rick’s Hairstyling
Income Statement
For the Month Ended March 31

Budgeted client-visits .......…………………………........... 1,100

Revenue .................……………………………………............ $194,200
Expenses:
Wages and salaries …….......................................... 106,900
Hairstyling supplies ……………………......................... 1,620
Client gratuities ……………………………....................... 6,870
Electricity ………………………...................................... 1,550
Rent …………………………………………............ .............. 28,500
Liability Insurance ………………………......................... 2,800
Employee health insurance ………........................... 22,600
Miscellaneous ………………....................................... 2,130
Total Expense………………………………………………........... 172,970
Net operating income………………………………….......... $ 21,230
 In an attempt to analyze what happened in March, Rick prepared the report
comparing actual to budgeted costs. Note that most of the variances are labelled
Unfavorable (U) rather than Favorable (F) even though net operating income was actually
higher than expected. For example, wages and salaries show an Unfavorable variance of
$4,900 because the actual wages and salaries expense was $106,900, whereas the
budget called for wages and salaries of $102,000. The problem with the report, as Rick
immediately realized, is that it compares revenues and costs at one level of activity
(1.000 client-visits) to revenues and costs at a different level of activity (1,100 client-
visits).

This like compairing apples to oranges. Because Rick had 100 more client-visits than
expected, some of his costs should be higher than budgeted. From Rick's standpoint, the
increase in activity was good; however, it appears to be having a negative impact on
most of the costs in the report. Rick knew that something would have to be done to
make the report more meaningful, but he was unsure of what to do. So he contacted his
accountant, Victoria Kho, and asked her to analyze his salon's performance using the
data in Planning Budget and Income Statement.
 Rick’s Hairstyling
Comparison of Actual Results to Planning Budget
For the Month Ended March 31

Actual Planning
Results Budget Variances
Budgeted client-visits .......………… 1,100 1,000
Revenue .................…………………… 194,200 $180,000 $ 14,200 F
Expenses:
Wages and salaries …….............. 106,900 102,000 4,900 U
Hairstyling supplies ………………… 1,620 1,500 120 U
Client gratuities ……………………… 6,870 4,100 2,770 U
Electricity ……………………….......... 1,550 1,600 50 F
Rent ……………………………………….. 28,500 28,500 0
Liability Insurance …………………… 2,800 2,800 0
Employee health insurance …….. 22,600 21,300 1,300 U
Miscellaneous ………………........... 2,130 1,400 730 U
Total Expense…………………………….. 172,970 163,200 9,770 U
Net operating income……………….. $ 21,230 $ 16,800 $ 4,430 F
 Victoria responded to Rick's request by preparing the flexible budget (See Flexible Budget).
Her flexible budget shows what the revenues and costs should have been given the actual
level of activity in March. She calculated the expenses in her flexible budget by using Rick's
cost formula (See Planning Budget) to estimate what each expense should have been for
1,100 client-visits - the actual level of activity. For example, using the cost formula $1,500 +
$0.10q, the cost of electricity in March should have been $1,610 (= $1,500 + $0.10q x 1,100).
Also, notice that the amounts for rent ($28,500), liability insurance ($2,800), and employee
health insurance ($21,300) in Victoria's flexible budget equal the corresponding amounts
included in Rick's planning budget. This occurs because fixed costs are not affected by the
activity level.

We can see from the flexible budget that the net operating income in March should have
been $30,510, but recall from Income Statement that the net operating income was actually
only $21,230.

To summarize to this point, Rick had budgeted for a profit of $16,800. The actual profit was
quite a bit higher - $21,230. However, Victoria's analysis shows that given the actual number
of client-visits in March, the profit should have been higher - $30,510. What are the causes of
these discrepancies?
 Rick’s Hairstyling
Flexible Budget
For the Month Ended March 31

Budgeted client-visits (q)……………………………........... 1,100

Revenue ($180.00q)……………………………………........... $198,000
Expenses:
Wages and salaries ($65,000 + $37.00q)…….......... 105,700
Hairstyling supplies ($1.50q)……………………............ 1,650
Client gratuities ($4.10q)…………………………….......... 4,510
Electricity ($1,500 + $0.10q)……………………….......... 1,610
Rent ($28,500)…………………………………………............ 28,500
Liability Insurance ($2,800)………………………............ 2,800
Employee health insurance ($21,300)………............ 21,300
Miscellaneous ($1,200 + $0.20q)………………........... 1,420
Total Expense………………………………………………........... 167,490
Net operating income………………………………….......... $ 30,510
 Revenue Variances vs Spending
Variances

Revenue Variances:
A revenue variance is the difference between the actual total
revenue and what the total revenue should have been, given
the actual level of activity for the period. If actual revenue
exceeds what the revenue should have been, the variance is
labelled FAVORABLE. If actual revenue is less than what the
revenue should have been, the variance is labelled
UNFAVORABLE.
Spending Variances:
A spending variance is the difference between the actual
amount of the cost and how much a cost should have been,
given the actual level of activity. If the actual cost is greater
than what the cost should have been, the variance is labelled
as UNFAVORABLE. If the actual cost is less than what the cost
should have been, the variance is labelled FAVORABLE.
 Rick’s Hairstyling
Revenue and Spending Variances
For the Month Ended March 31

Actual Planning Revenue and

Results Budget Spending Variances
Budgeted client-visits (q)…………………………….... 1,100 1,100
Revenue ($180.00q)…………………………………….... $ 194,200 $198,000 $ 3,800 U
Expenses:
Wages and salaries ($65,000 + $37.00q)……... 106,900 105,700 1,200 U
Hairstyling supplies ($1.50q)……………………..... 1,620 1,650 30 F
Client gratuities ($4.10q)……………………………... 6,870 4,510 2,360 U
Electricity ($1,500 + $0.10q)………………………... 1,550 1,610 60 F
Rent ($28,500)…………………………………………..... 28,500 28,500 0
Liability Insurance ($2,800)………………………..... 2,800 2,800 0
Employee health insurance ($21,300)………..... 22,600 21,300 1,300 U
Miscellaneous ($1,200 + $0.20q)……………….... 2,130 1,420 710 U
Total Expense……………………………………………….... 172,970 167,490 5,480 U
Net operating income…………………………………... $ 21,230 $ 30,510 $ 9,280 U
FLEXIBLE BUDGETS
WITH MULTIPLE
COST DRIVERS
COST DRIVERS – DEFINITION

 An activity which generates cost.

A factor such as the level of activity or volume that casually
affects cost.
Existence of a cause-and-effect relationship between a
change in the level of activity or volume and change in the
level of total costs of the cost object.
It signify factors, forces, or events that determine the costs
of activities.
Cost driver – why?

• They are the links between a pool of costs in an activity

center and the product.

A pool Cost
Product
of costs Drivers

• Therefore in order to trace overhead costs to products,

appropriate cost drivers should be identified.
 Cost pools & cost drivers
ACTIVITY COST POOLS ACTIVITY COST DRIVERS
PRODUCTION Number of units
Number of set-ups
Number of electricity units consumed
MARKETING Number of sales personnel
Number of sales orders
RESEARCH & DEVELOPMENT Number of research projects
Personnel hours spend on projects
Technical complexities of the projects
CUSTOMER SERVICE Number of service calls
Number of products serve
Hours spend on servicing products
PURCHASING Number of purchase orders
MATERIAL HANDLING Number of material requisitions
Cost driver
• In simple terms, cost driver can be defined as the
driver of cost. Just like a driver drives the car, cost
driver drives the cost.
• Cost driver has cause and effect relationship with the
total cost.
• If we take an example of fuel
cost of running a car, the cost
driver (cause) would be ‘No. of
Kms. Run’ and the total cost
(effect) would be ‘total cost of
fuel’.
• A properly defined cost driver can
be of great use for the managers.
The precondition is the cause and
effect relationship between cost
drivers and their respective activity
or cost center. If a manager knows
with reasonable accuracy that what
is driving its costs, he may focus on
that reducing the quantity of that
cost driver.
 At Rick’s Hairstyling, we have
thus far assumed that there is
only one cost driver:

NUMBER OF CLIENT-VISITS
Cost drivers:
 Number of client-visits
 Number of operating hours
 Employees paid on an hourly basis
 Cost of electricity
 Exhibit 8-7: flexible budget based
on more than one cost drvier
For the flexible budget for Rick’s Hairstyling, two cost drivers
are listed:
Client-Visits and Hours of Operation
Where:
q1 – client-visits
q2 – hours of operation
 Rick's Hairstyling
Flexible Budget
For the Month Ended March 31

Actual Client-visits (q1) 1,100

Actual hours of operation (q2) 190
Revenue ($180.00q1) $198,000
Expenses:
Wages and salaries ($65,000 + $220q2) 106,800
Hairstyling supplies ($1.50q1) 1,650
Client gratuities ($4.10q1) 4,510
Electricity ($390 + $0.10q1 + $6.00q2) 1,640
Rent ($28,500) 28,500
Liability Insurance ($2,800) 2,800
Employee health insurance ($21,300) 21,300
Miscellaneous ($1,200 + $0.20q1) 1,420
Total Expense 168,620
Net Operating Income $29,380
The flexible budget based on two cost drivers
is more accurate than the flexible budget
based on one driver.
STANDARD COST
STANDARD
• a benchmark for measuring performance
• one of important quantitative tools in the hand of management to
control and measure performance of business operations
COST
• An amount that has to be paid or given up in order to get
something
• expenditure made to achieve an object
STANDARD COST
• practice of substituting an expected cost for an actual cost
in the accounting records
• involves the creation of estimated (i.e., standard) costs for
some or all activities within a company
• described as a predetermined cost, an estimated future
cost, an expected cost, a budgeted unit cost, a forecast
cost, or a "should be" cost.
Advantages of Standard Costing

 Budgeting

 Inventory Costing

 Overhead Application

 Price formulation
Problem:
The Colonial Pewter Company makes only one product- an elaborate
reproduction of an 18th century pewter statue. The statue is made largely by hand,
using traditional metal-working tools. Consequently, the manufacturing process is
labor intensive and requires a high level of skill.
Colonial Pewter has recently expanded its workforce to take advantage of
unexpected demand for the statue as a gift. The company started with a small
cadre of experienced pewter workers but has had to hire less experienced workers
as a result of the expansion. The management wants to know the production
problems. They asked Terry Sherman, the controller, to give the answers that is
related to worker productivity, material waste and input prices.
 First, she set the quantity standard for pewter at 3.0 pounds per status.
After consulting with purchasing manager, Terry set the standard price of pewter at
$4.00 per pound. After consulting with the production manager and considering
reasonable allowances for breaks, personal needs of employees, cleanup and
machine downtime, Terry set the standard hours per unit at 0.50 direct labor-hours
per statue. Using wage records and in consultation with the production manager,
Trey Sherman established a standard rate per hour of $22.00. At Colonial Pewter,
the variable portion of the predetermined overhead rate is $6.00 per direct labor-
hour.
STANDARD QUANTITY PER UNIT
 Defines the amount of direct materials that should be used
for each unit of finished product.

STANDARD PRICE PER UNIT

 Defines the price that should be paid for each unit of direct
materials.
STANDARD DIRECT MATERIALS COST
 the expected price of a unit of material
 To compute standard direct materials cost per unit,
multiply the standard quantity per unit by the standard
price per unit
EXAMPLE:
INPUT STANDARD QUANTITY STANDARD PRICE STANDARD COST

DIRECT MATERIALS 3.0 POUNDS $4.00 PER POUND ?????????

STANDARD HOURS PER UNIT

 Defines the amount of amount of direct labor-hours that

should be used to produce one unit of finished goods.

STANDARD RATE PER HOUR

 Defines the company’s expected direct labor wage rate per

hour
STANDARD DIRECT LABOR COST
 means calculating an expected hourly rate for labor costs.

 To compute standard direct labor cost per unit, multiply

the standard hours per unit by the standard rate per unit
EXAMPLE:
INPUT STANDARD HOUR STANDARD RATE STANDARD COST

DIRECT LABOR 0.50 HOURS $22.00 PER HOUR ?????????

MANUFACTURING OVERHEAD COSTS
 refer to any costs within a manufacturing facility other than
direct material and direct labor.
EXAMPLE:
INPUT STANDARD HOUR STANDARD RATE STANDARD COST

VARIABLE 0.50 HOURS $6.00 PER HOUR ?????????

MANUFACTURING
OVERHEAD
 INPUTS STANDARD STANDARD PRICE STANDARD COST
QUANTITY OF OR RATE
HOURS
DIRECT MATERIALS 3.0 POUNDS $4.00 PER POUND $ 12.00

DIRECT LABOR 0.50 HOURS $22 PER POUND 11.00

VARIABLE 0.50 HOURS $6.00 PER HOUR 3.00

MANUFACTURING
OVERHEAD
TOTAL STANDARD $26.00
COST PER UNIT
Actual output in June 2,000 statues

Actual direct materials cost in June* $24,700

Actual direct labor cost in June $22,680

Actual variable manufacturing overhead cost $7,140

in June

*There were no beginning or ending inventories of raw materials in June;

all materials purchased were used.
 Colonial Pewter
Spending Variances – Variable Manufacturing Costs Only
For the Month Ended June 30

Actual Results Spending Varainces Flexible Budget

Statues produced (q) 2,000 2,000
Direct materials $24,700 $700 U $24,000
($12.00q)
Direct labor ($11.00q) $22,680 $680 U $22,000
Variable $7,140 $1,140 U $6,000
manufacturing
overhead ($3.00q)
Using Standard
Cost
 (1) (2) (3)
Actual Quantity of Actual Quantity of input, Standard Quantity Allowed for
input, at Actual Price at Standard Price Actual output, at Standard Price
(AQ x AP) (AQ x SP) (SQ x SP)

Price Variance Quantity Variance

(1) - (2) (2) - (3)

Material Price variance Material quantity variance

Labor rate variance Labor efficiency variance
Variable overhead rate variance Variable overhead efficiency variance

Spending Variance
(1) - (3)
Direct Materials Variances
Direct Material Standard:
3.0 pounds per statue X $4.00 per pound = $12.00 per statue
Actual purchased: (QTY MATERIAL PURCHASED EQUAL THE QTY USED IN
PRODUCTION)
Actual Quantity (AQ) - 6,500 pounds (Used to manufacture 2,000 unit of statue)
Actual Price (AP) - $ 3.80 per pound
Material Price Variance = (AQ X AP) - (AQ X SP)
=(6,500 pounds x $3.80 per pound) - (6,500 pounds x $4.00 per pound)
=$24,700 - $26,000
= - $1,300
Direct Materials Variances
Direct Material Standard:
3.0 pounds per statue X $4.00 per pound = $12.00 per statue
Actual purchased:(QTY MATERIAL PURCHASED EQUAL THE QTY USED IN PRODUCTION)
Actual Quantity (AQ) - 6,500 pounds (Used to manufacture 2,000 unit of statue)
Actual Price (AP) - $ 3.80 per pound

Material Quantity Variance = (AQ X SP) - (SQ X SP)

=(6,500 pounds x $4.00 per pound) - (6,000 pounds* x $4.00 per pound)
= $26,000 - $24,000 *SQ = Actual output X Standard quantity
=$2,000 = 2,000 unit X 3.0 pounds per unit
= 6,000 pounds
Direct Materials Variances
Direct Material Standard:
3.0 pounds per statue X $4.00 per pound = $12.00 per statue
Actual purchased: (QTY MATERIAL PURCHASED DOES NOT EQUAL THE QTY USED
IN PRODUCTION)
Actual Quantity (AQ) - 7,000 pounds (6,500 pounds used to manufacture 2,000
unit of statue)
Actual Price (AP) - $ 3.80 per pound
Material Price Variance = (AQ X AP) - (AQ X SP)
=(7,000 pounds x $3.80 per pound) - (7,000 pounds x $4.00 per pound)
=$26,600 - $28,000
= - $1,400
 Direct Materials Variances
Direct Material Standard:
3.0 pounds per statue X $4.00 per pound = $12.00 per statue
Actual purchased: (QTY MATERIAL PURCHASED DOES NOT EQUAL THE QUANTITY USED IN
PRODUCTION)
Actual Quantity (AQ) - 7,000 pounds (6,500 pounds used to manufacture 2,000 unit of statue)
Actual Price (AP) - $ 3.80 per pound

Material Quantity Variance = (AQ X SP) - (SQ X SP)

=(6,500 pounds x $4.00 per pound) - (6,000 pounds* x $4.00 per pound)
= $26,000 - $24,000 *SQ = Actual output X Standard quantity

=$2,000 = 2,000 unit X 3.0 pounds per unit

= 6,000 pounds
Direct Labor Variances
Direct Labor cost Standard:
0.50 hours per statue X $22.00 per hour = $11.00 per statue
Actual purchased:
Actual Hour (AH) - 1,050 hour (Used to manufacture 2,000 unit of statue)
Actual Rate (AR) - $22,680 ($ 21.60 per hour*)
*$22,680/1,050 hour = $21.60 per hour

Labor Rate Variance = (AH X AR) - (AH X SR)

=(1,050 hour x $21.60 per hour) - (1,050 hour x $22.00 per hour)
=$22,680 - $23,100
= - $420
Direct Labor Variances
Direct Labor cost Standard:
0.50 hours per statue X $22.00 per hour = $11.00 per statue
Actual input:
Actual Hour (AH) - 1,050 hour (Used to manufacture 2,000 unit of statue)
Actual Rate (AR) - $22,680 ($ 21.60 per hour*)
*$22,680/1,050 hour = $21.60 per hour
Labor Efficiency Variance = (AH X SR) - (SH X SR)
=(1,050 hour x $22.00 per hour) - (1,000 hours* x $22.00 per hour)
= $23,100 - $22,000 *SH = Actual output X Standard hours
= 2,000 unit X 0.50 hours per unit
=$1,100 = 1,000 hours
Variable Manufacturing Overhead
Variances
Variable Manufacturing Overhead Standard:
0.50 hours per statue X $6.00 per hour = $3.00 per statue
Actual input:
Actual Hour (AH) - 1,050 hour (Used to manufacture 2,000 unit of statue)
Actual Rate (AR) - $7,140 ($ 6.80 per hour*)
*$7,140/1,050 hour = $6.80 per hour
Variable Overhead Rate Variance = (AH X AR) - (AH X SR)
=(1,050 hour x $6.80 per hour) - (1,050 hour x $6.00 per hour)
=$7,140 - $6,300
= $840
Variable Manufacturing Overhead
Variances
Variable Manufacturing Overhead Standard:
0.50 hours per statue X $6.00 per hour = $3.00 per statue
Actual input:
Actual Hour (AH) - 1,050 hour (Used to manufacture 2,000 unit of statue)
Actual Rate (AR) - $7,140 ($ 6.80 per hour*)
*$7,140/1,050 hour = $6.80 per hour
Variable Overhead Efficiency Variance = (AH X SR) - (SH X SR)
=(1,050 hour x $6.00 per hour) - (1,000 hours* x $6.00 per hour)
*SH = Actual output X Standard hours
= $6,300 - $6,000
= 2,000 unit X 0.50 hours per unit
=$300 = 1,000 hours
TO SUMMARIZE:
Price Variance Quantity Variance

Material Price Variance 1,300 (F) Material Quantity Variance 2,000 (U)

Labor Rate Variance 420 (F) Labor Efficiency Variance 1,100 (U)

Variable Overhead Rate Variace 840 (U) Variable Overhead Rate Variance 300 (U)
THE END