Example used for Chapter 7 and Chapter 8 Chapter 7: Flexible budget and DM/DL variances Chapter 8: VOH and FOH variances ABB Inc. has actual and budgeted operating income (be noted that, for simplicity, we do not include non-manufacturing costs) for year 2007 as follows Sales volume Selling price Actual 900 units S120 Budget 1,000 units $100 Sales - Variable costs $108,000 S100,000 Direct matcrials Direct labor Variable OH 27,000 18,000 13,500 20,000 30,000 10,000 Total variable 58.500 49,500 23,000 26,500 Contribution margin 40,000 Fixed OH Operating income 20,000 Based on the budget, ABB has a standard cost card as follows Budgeted input units for 1 unit of FG Standard input quantity) 2 pounds 3 hours 2.5 machine hours Budgeted input price Direct material Direct labor Variable OH -Standard price) S10 per pound S10 per hour 4 per MH Budgeted input cost for 1 unit of FG (Standard unit cost) S? S? S? Fixed OH S 20,000 in total for production capacity of 1,000 units The actual inputs of DM, DL and V.OH are as follows Direct materials purchased and used: 1,350 pounds Direct labor hours: 2250 hours Variable OH: 4500 machine hours Price per pound: $20 Labor rate: $8 V.OH application rate: $3 per machine hour Required 1. Prepare a flexible budget 2. Conduct variance analysis 3. VOH and FOH are allocated based on machine hours, calculate VOH rate, FOH rate, VOH applied, and FOH applied 4. Make journal entries under Standard Costing system a. purchase of direct materials b. issue of direct materials into production c. use of direct labor in production d. actual OH (variable and fixed) e. allocated OH (variable and fixed) f. OH variances (variable and fixed)