CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL 391 7-35 Flexible budgets, variance analysis. You have been hired as a consultant by Sandeep, the president of a small manufacturing company that makes automobile parts. Sandeep is an excellent engineer, but he has been frustrated by working with Inadequate cost dala. You helped install flexible budgeting and standard costs. Sandeep has asked you to consider the following May data and recommend how variances might be computed and presented in performance reports: Static budget in output units Actual output units produced and sold Budgeted selling price per output unit Budgeted variable costs per output unit Budgeted total fixed costs per month Actual revenue Actual variable costs Favorable variance in fixed costs 20,000 23,000 *40 *25 *2,00,000 8,74,000 *6,30,000 *5,000 Sandeep was disappointed. Although output units sold exceeded expectations, operating income did not. Assume that there was no beginning or ending inventory. 1. You decide to present Sandeep with alternative ways to analyze variances so that he can decide what level of detail he prefers. The reporting system can then be designed accordingly. 2. What are some likely causes for the variances you report in requirement 1? 7-36 Flexible-budget preparation and analysis. Bank Printers Limited, produces luxury check-books with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer's bank. The company's operating budget for September included these data: Number of checkbooks Selling price per book Variable cost per book Fixed costs for the month The actual results for September were: Number of checkbooks produced and sold Average selling price per book 15,000 20 8 *1,45,000 12,000 *21 27 1,50,000 Required Variable cost per book Fixed costs for the month The executive Vice-president of the company observed that the operating income for September was much less than anticipated, despite a higher-than-budgeted selling price and a lower-than- budgeted variable cost per unit. You have been asked to provide explanations for the disappointing September results. Bank Printer Limited develops its flexible budget on the basis of budgeted per-output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs. 1. Prepare a Level 1 analysis of the September performance. 2. Prepare a Level 2 analysis of the September performance. 3. Why might Bank Printer find the Level 2 analysis more informative than the Level 1 analysis? Explain your answer. 7-37 Materials and manufacturing labor variances, standard costs. Consider the following selected data regarding the manufacture of a line of upholstered chairs: Direct materials Direct manufacturing labor Standards per Chair 2 square yards of input at 100 per square yard 0.5 hour of input at 40 per hour