Alson is the cost accountant at a manufacturer of exquisite glass serving bowls. The materials used for the bowls are inexpensive, but the process is labour intensive. The supervisor decided to use cheaper labour this period to see whether costs could be reduced. Alson needs to prepare a report for her supervisor about how effective operations had been during the month of January. She has previously set the following standards.

Cost per unit
Direct materials	3.5 kg @ $2.40	$8.4
Direct labour	5.5 hours @ $14	77
Factory overhead:
Variable	$3 per direct labour hour	16.5
Fixed	$25 per unit	25.00

Variable overhead is allocated by labour hours and fixed overhead is allocated by unit. Estimated production per month is 8 000 units (44 000 direct labour hours) with fixed overhead expenditure budgeted at $200,000.

Records for January, based on production of 7 800 units, indicated the following:

Direct materials purchased	28 000 kg @ $2.8	$78,400
Direct materials used	24 500 kg
Direct labour	40 500 hours @ $14.85	$601,425
Variable overhead		$130,700
Fixed overhead		$205,000

Required

1.         Prepare a flexible budget to enable assessment of the strategy undertaken by management.                                        

2.         Discuss the variances and recommend whether any of them should be investigated further.                                                   

3.         Calculate the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead and comment on the result.

Answer rating: 100% (QA)

Solution Prepare a flexible budget to enable assessment of the strategy undertaken by management Par... View the full answer