• 10 Marks

MA – Nov 2024 – L2 – Q3a – Flexible Budget and Variance Analysis

Preparation of a flexible budget and calculation of sales, material, and labour variances.

The budget and actual income statement of Shatta Company PLC for the month of April have been presented in the table below:

Budget Actual
Output (production and sales) 10,000 9,000
GH¢ GH¢
Sales Revenue 175,000 162,000
Raw Materials (80,000) (100,000 meters) (64,380) (74,000 meters)
Labour (35,000) (5,000 hours) (30,960) (4,300 hours)
Fixed Overheads (35,000) (36,225)
Operating Profit 25,000 30,435

Required:

i) Prepare a flexible budget for Shatta Company PLC.

ii) Calculate the following variances using the marginal costing system:

  • Sales (price, volume)
  • Material (price and usage)
  • Labour (rate and efficiency)

i) Flexible Budget for April

Budget Flexed Budget
Output (production and sales) 10,000
GH¢ GH¢
Sales Revenue 175,000
Raw Materials (100,000 meters) (80,000)
Labour (5,000 hours) (35,000)
Fixed Overheads (35,000)
Operating Profit 25,000

Workings:

  • Raw Material Price per Unit = GH¢80,000 ÷ 100,000 meters = GH¢0.80 per meter
  • Labour Rate per Hour = GH¢35,000 ÷ 5,000 hours = GH¢7 per hour

(4 marks)

ii) Variance Analysis

Sales Variances

  • Sales Volume Variance

    (10,000−9,000)×Budgeted Contribution per Unit(10,000 – 9,000) \times \text{Budgeted Contribution per Unit} =(1,000)×(17.5−(8+3.5))= (1,000) \times (17.5 – (8 + 3.5)) =1,000×6=6,000 (Adverse)= 1,000 \times 6 = 6,000 \text{ (Adverse)}

  • Sales Price Variance

    (175,000÷10,000)−(162,000÷9,000)×9,000(175,000 ÷ 10,000) – (162,000 ÷ 9,000) \times 9,000 =(17.5−18)×9,000=4,500 (Favourable)= (17.5 – 18) \times 9,000 = 4,500 \text{ (Favourable)}

Material Variances

  • Total Variance

    72,000−64,380=7,620 (Favourable)72,000 – 64,380 = 7,620 \text{ (Favourable)}

  • Material Price Variance

    (0.80−0.87)×74,000(0.80 – 0.87) \times 74,000 =−0.07×74,000=5,180 (Adverse)= -0.07 \times 74,000 = 5,180 \text{ (Adverse)}

  • Material Usage Variance

    (90,000−74,000)×0.80(90,000 – 74,000) \times 0.80 =16,000×0.80=12,800 (Favourable)= 16,000 \times 0.80 = 12,800 \text{ (Favourable)}

Labour Variances

  • Total Labour Variance

    31,500−30,960=540 (Favourable)31,500 – 30,960 = 540 \text{ (Favourable)}

  • Labour Rate Variance

    (7.0−7.2)×4,300(7.0 – 7.2) \times 4,300 =−0.2×4,300=860 (Adverse)= -0.2 \times 4,300 = 860 \text{ (Adverse)}

  • Labour Efficiency Variance

    (4,500−4,300)×7(4,500 – 4,300) \times 7 =200×7=1,400 (Favourable)= 200 \times 7 = 1,400 \text{ (Favourable)}

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