Question: High Mechanics Inc. manufactures automobile tyres. The company manufactures winter tyres and highperformance tyres. The CFO of the company analysed the production and cost report

High Mechanics Inc. manufactures automobile tyres. The company manufactures winter tyres and highperformance tyres. The CFO of the company analysed the production and cost report for the month of December and noticed that the production quantities achieved its benchmark. However, the actual number of hours recorded was more than standard hours. The CFO contacted the department supervisor to brief him on why production was slack in the month of December. The supervisor provided the following information from the standard cost sheet:

Standard labour-hours are expected to be 4,000 per month. However, in December, the production department experienced multiple staff on unplanned leave, as a result of which the rest of the skilled and experienced employees had to work extra hours to meet the production benchmark for the month. The employees recorded 6,500 actual labour-hours. The following total actual variable overhead costs were incurred during December:

The supervisor also mentioned that several skilled workers were involved in production, which led to the efficient use of power. Hence, the actual utility cost was slightly lower than the standard utility cost during the month. The company uses labour-hours as the basis of its performance report. For December, High Mechanics estimated sales of 800 winter tyres and 200 high-performance tyres. The expected per-tyre contribution was £30 for winter tyres and £60 for high-performance tyres. However, the company sold 900 winter tyres for £30 each and 100 high-performance tyres for £60 each. The company considers winter tyres and high-performance tyres substitutes for each other.

Required
1. Prepare a flexible budget performance report. Compute the variable overhead spending variance and variable overhead efficiency variance.
2. Calculate overhead efficiency variance if the standard hours for January will be increased to 8,000 labour-hours.
3. Calculate the total sales activity variance for the month of December. Also, comment on the sales activity variance of High Mechanics.
4. Explain how an activity-based budget works and list the advantages of activity-based budgeting.

Utilities Indirect labour Other costs 0.60 1.40 0.40