Hello everyone,
I have a doubt on the below question. The doubt is shouldn't the budgeted amount be 42,000/37,500=$1.12? Why is taken as Actual amount divided by standard hours i.e 63,000/37,500?. Flexible budgeting is about comparing the actual standard amount with actual amount right?
Olive Industries produced 30,000 units this month and used 36,000 machine hours. The company's static budget for manufacturing overhead costs based on 37,500 machine hours is as follows:
Variable
|
Indirect materials
|
$294,000
|
Indirect labor
|
420,000
|
Factory supplies
|
42,000
|
Fixed
|
Depreciation
|
$126,000
|
Taxes
|
21,000
|
Supervision
|
105,000
|
During the month, Olive's actual costs were $1.75 per machine hour for factory supplies. What is the amount of difference for factory supplies shown on the company's manufacturing overhead flexible budget report?
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$7,980 favorable
|
|
$2,625 unfavorable
|
|
$2,520 unfavorable
|
|
$0 – budgeted and actual costs were equal
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You Answered Correctly!
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Since factory supplies is a variable cost, the amount in a flexible budget will be different from the amount in a static budget to the extent that the actual activity level differs from the activity level used to prepare the static budget. Olive's budgeted amount of factory supplies is $1.68 per machine hour ($63,000 ÷ 37,500). If 36,000 machine hours are used, the factory supplies in the flexible budget will be $60,480 ($1.68 × 36,000). The actual amount of factory supplies is $63,000 ($1.75 × 36,000). Since actual spending is $2,520 more than the flexible budget amount, the $2,520 variance is unfavorable.
Regards,
Ritin Nair
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Ritin Nair
Analyst
Ocwen Financial Solutions Private Ltd.
Bangalore
India
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