Houston Corporation considers materials and labor to be completely variable cost

Question

Houston Corporation considers materials and labor to be completely variable costs. Expected production for the year is 50,000 units. At that level of production, direct materials cost is budgeted at $198,000, and direct labor cost is budgeted at $450,000. Prepare a flexible budget for materials and labor for possible production levels of 52,500, 60,000, and 67,500 units of product. Assume that in the previous exercise the actual production was 60,000 units, materials cost was $247,000, and labor cost was $510,000. What are the budget variances? Show the analysis in a table format. Write a one-paragraph interpretation of the information presented in the table.

Explanation / Answer

Flexible budget for Material and Labour 50000 units 52500 units 60000 units 67500 units Material Cost 198,000 207900 237600 267300 (i.e. 198,000 /50,000 = $ 3.96 per unit) Labour Cost 450,000 472500 540000 607500 (i.e. 450,000/50,000 =$9 per unit) Total material and labour cost 648,000 680,400 777,600 874,800 Comparison and budget variance 60,000 units Budgeted Actual Variance Material cost 237600 247000 -9400 Unfav Labour cost 540000 510000 30000 Fav Total 777600 757000 20600 Fav Material cost variance is unfavorable to the extent of $ 9400. This may be due to any of the two reasons i.e. price and quantity. Labour cost variance is favorable to the extent of $ 30,000. This may also be due to rate per hours of labour and effificeny increase in the labours. With the above, overall result in the decrease in cost by standard set by $ 20,600

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