Brackendale Ltd

When the standards for the year ahead were set, it was expected that monthly output of units manufactured would be 10,000 units. By the time July was reached, output had fallen to 8,000 units per month because of a fall in market share of sales. The table set out below reports the original budget and the actual outcome for the month of July 2016.

The original budget is based on a standard direct material cost of $4 per kg of raw material, a standard direct labour cost of $10 per hour and a standard variable cost rate of $6 per direct labour hour. Each unit of output requires 0.5 kg of raw materials and 6 minutes of labour time.

The actual cost of direct materials was found to be $4.40 per kg, the actual cost of direct labour was found to be $11.00 per hour and the actual variable overhead cost rate was $5.60 per direct labour hour. 3,800 kg of materials were used and the actual labour hours worked were1,000.

Data relevant to the month of July are as follows:

	Original budget	Actual for July
Production in units	10,000	8,000
Direct materials	20,000	16,720
Direct labour	10,000	11,000
Variable overhead	6,000	5,600
Fixed overhead	7,000	7,500
	43,000	40,820

The budget selling price is $6 per unit. The actual selling price is also $6.

Required:

1. Prepare a flexible budget in respect of Brackendale Ltd for the month of July 2016.

2. Prepare an analysis which discloses standard cost variances for materials, labour and three variances for factory overhead.

3. Prepare a reconciliation of the budgeted profit and actual profit, based on variances.

4. Prepare a variance report for July. This report should bring to the attention of the production manager the main items highlighted by the process of variance analysis