Advanced: Reconciliation of budget and actual profit for a

standard absorption costing system. KHL manufactures a single

product and operates a budgetary control system that reports

performance using variances on a monthly basis. The company

has an agreement with a local suppler and calls off raw materials

as and when required. Consequently there is no inventory of raw

materials.

The following details have been extracted from the budget

working papers for 2011:

Annual Activity (units)

50 000 70 000 90 000

$000 $000 $000

Sales revenue 3 200 4 480 5 760

Direct materials (3 kgs per unit) 600 840 1 080

Direct labour (2 hours per unit) 1 000 1400 1 800

Variable overhead (2 hours per unit) 400 560 720

Fixed overhead (2 hours per unit)*

600 600 600

*

The fixed overhead absorption rate of $5 per hour was based on an annual

budget of 60 000 units of the product being produced at a constant monthly

rate throughout the year, with the fixed overhead cost being incurred in equal

monthly amounts.

The following actual performance relates to February 2011:

$ $

Sales revenue (5 700 units) 330 600

Direct materials (18 600 kgs) 70 680

Direct labour (11 500 hours) 128 800

Variable overhead (11 500 hours) 47 150

Fixed overhead absorbed 60 000

306 630

Finished goods inventory

adjustment

15 000 291 630

Gross profit 38 970

Fixed overhead over-absorption 3 000

Profit 41 970

For February 2011 budgeted sales were 6 000 units, the selling price

variance was $34 200 Adverse and the sales volume profit variance

was $4 200 Adverse. The actual fixed overhead incurred was $57 000.

Budgeted profit for February 2011 was $84 000.

Required:

Prepare a statement for February 2011 that reconciles the budgeted

profit of $84 000 with the actual profit of $41 970.

You should show the variances in as much detail as possible

given the data provided. (10 marks)

CIMA P2 Performance Management