4 You are an accountant for APC Bikes, a manufacturer of sturdy mountain bikes for intermediate-level bikers. The variable costs per bike include: Direct materials: $20.00 Wheel/tyres $70.00 Components $50.00 $140.00 Frame Total direct materials ($20 + $70 $50) $39.75 Direct labour $75.00 Variable overhead Total cost per bike ($140 + $39.75 + $75) The budgeted selling price is $800 (per bike). The budgeted fixed costs of manufacturing overhead is $20,200,000 and the budgeted support department costs is $32,956,430. $254.75 You calculate variances for sales volume, revenue and each of the cost categories and create the following static budget variances at APC Bike. When you compares the actual results to the budget, you are pleased with the organisation's performance during the period. The overall variance was favourable by nearly $2.7 million, and the revenue variance was positive and large $10.5 million. However, you are concerned about the large unfavourable cost variances. Static Favourable / Unfavourable Actual Variance budget Favourable Bikes sold 100,000 113,500 13,500 $90,500,000 $10,500,000 $80,000,000 Revenue Favourable Production costs: $25,475,000 Variable $29,492,408 $4,017,408)| Unfavourable Notes 1) $20,200,000 $19,400,000 $800,000 Fixed overhead Favourable Support department$32,956,430 $37,565,337 ($4,608,907) | Unfavourable costs $1,368,570 $4,042,255 Net income $2,673,685 Favourable Total variance Notes 1: Budgeted variable costs x 100,000 $254.75 x 100,000 $25,475,000 You realise that you would expect to see unfavourable variable production cost variances because the sales volume was higher than planned. Because you used a static budget in your schedule, the cost variances did not reflect the actual volume of sales. Therefore, the schedule gave you poor quality information for analysing last period's costs. Required: How can you revise budgets, as required, to deal with this issue? (Hint: You can use the following table to create a new flexible budget variances analysis that reflects the actual volume of sales. Read "Flexible Budget" section on pages 66 to 68 of your workbook.) (10 marks) Favourable / Unfavourable Flexible Actual Variance budget Bikes sold 113,500 $90,500,000 Revenue Production costs: $29,492,408 Variable $19,400,000 Fixed overhead Support department $37,565,337 costs $4,042,255 Net income Total variance