6.19 Flexible budget and variances; performance measurement; reasons for variances LO4 Play Time Toys is organised into two major divisions: marketing and production. The production division is further divided into three departments: puzzles, dolls and video games. Each production department has its own manager.

The entitys management believes that all costs must be covered by sales of the three product lines. Therefore, a portion of headquarters, marketing and the production division costs are allo- cated to each product line.

The entitys accountant prepared the following performance report for the manager of the dolls production department.

Required

(a) Is Play Time using a static budget or a flexible budget to calculate variances? Explain. Do you agree with this approach? Why? (b) Develop an appropriate benchmark for evaluating the performance of the dolls production department. Decide whether to include or exclude each cost category, and explain your decisions. (c) Use the benchmark you created in part (b) to calculate variances.

(d) Review the variances from part (c). Briefly describe the types of operating or budgeting problems that might have caused these variances.

Performance report dolls production department Volumes and total dollar amounts are in thousands.) Variance 100 F S 400 F (100) U (225) U (100) U (220) U Cost forecasts Sales volume Revenue Direct materials Direct labour Variable factory overhead Fixed factory overhead Production division overhead Headquarters Marketing Operating income 1 000 $12.00/unit 2.00/unit 1.00/unit 1.00/unit 0.80/unit 0.10/unit 0.20/unit 0.50/unit $ 6.40/unit Budget 1000 $12000 2000 1000 1000 800 100 200 500 $6400 Actual 1 100 $12 400 2 100 1225 1100 1 020 105 220 550 $6080 (20) U (50) U S(320) U