Flexible budgeting

Mana Ltd manufactures and sells one product. The manufacturing report for February has just been

finalised. This report shows an unfavourable operating profit variance of $272,000, despite higher

than expected sales revenue. You have indicated to management that measuring actual performance against a static budget is not useful. When using budgets for controlling purposes a flexible budget needs to be prepared.

	February budget	February actual	February variance
Sales revenue	15,000,000	16,038,000	1,038,000	F
Variable costs:
Direct material cost	2,250,000	2,916,000	666,000	U
Direct labour cost	1,875,000	2,430,000	555,000	U
Variable manufacturing overhead cost	1,125,000	1,134,000	9,000	U
Variable selling and administrative expenses	375,000	405,000	30,000	U
Contribution margin	9,375,000	9,153,000	222,000	U
Fixed costs:
Fixed manufacturing overhead cost	500,000	550,000	50,000	U
Fixed selling and administrative expenses	2,000,000	2,000,000	0
Operating profit	6,875,000	6,603,000	272,000	U

Additional information

The budgeted sales units for February is 75,000 units. Mana Ltd sold 81,000 units February.

1. Prepare a flexible budget for February by showing both flexible budget variances and volume variances.

2. Comment on the following flexible budget variances you calculated.

Sales revenue. Provide an explanation of the variance and three possible causes of the

variance.

Direct material cost. Provide an explanation of the variance and two possible causes of the variance.

Direct labour cost. Provide an explanation of the variance and two possible causes of the variance.

Variable manufacturing overhead cost. Provide an explanation of the variance and two possible causes of the variance.

Fixed manufacturing overhead cost. Provide an explanation of the variance and two possible causes of the variance.