Al-Jannah Bhd is a manufacturer of product based on goat milk. The management of

Question

Al-Jannah Bhd is a manufacturer of product based on goat milk. The management of the company employs flexible budgeting techniques to compare the firm's budgeted and actual factory overhead cost. Following is the information on budgeted and actual cost for January 2013: Since the management emphasizes on product quality, supervision and variable inspection costs are expected to increase by 5% and 10% respectively in year 2013. However, these changes have not been incorporated in the above budget. Required: a. Calculate variable cost per hour and fixed cost for each of the overhead cost. b. Prepare performance report for January 2013. c. Identify three advantages of flexible budget.

Explanation / Answer

a Putting the variable cost /hr into total cost we get the follwing cost matrix Overhead cost details Variable cost/Hr Fixed cost part Materials Handling $                         0.30                      10,000 Repairs $                         0.15                        4,500 Inspection $                         0.50                      12,000 Insurance $                              -                        31,000 Supervision $                              -                        20,000 Rental $                              -                        25,000 b Performance Report for 40000 Hours Overhead cost details Flexible budget cost for 40000 hours Actual cost for 40000 hrs   Variance   F/U/NA Materials Handling                         22,000                      22,800                  800 Unfavorable Repairs                         10,500                      10,000                  500 Favorable Inspection                         32,000                      33,000              1,000 Unfavorable Insurance                         31,000                      32,700              1,700 Unfavorable Supervision                         20,000                      21,500              1,500 Unfavorable Rental                         25,000                      26,500              1,500 Unfavorable Total Overhead Cost                       140,500                   146,500              6,000 Unfavorable     c Advantages of Flexible budgets: 1. Comparable budgets at different activity levels can be prepared. 2. The Flexible budget variances more logically reflects the expense and revenue variance position   3. It eleminates the effect of activity level change from total variance as compared to static budget.

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