Mechanical Co is comparing budget and the actual data for the last 3 months as follows: (all in RM)

Budget Actual

Sales 950,000 922,500

Cost of Sales

Raw Materials 133,000 130,500

Direct Labor 152,000 153,000

Variable production overhead 100,700 96,300

Fixed production overhead 125,400 115,300

511,100 495,100

438,900 427,400

The budget was prepared on the basis of 95,000 units produced and sold, but actual production and sales for the 3-month period were 90,000 units

Mechanical Co uses standard costing and absorbs the fixed production overheads on a machine hour basis. A total of 28,500 standard machine hours were budgeted. A total of 27,200 machine hours were actually used in the 3-month period.

Required:

1. Prepare a revised budget at the new level of activity using a flexible budgeting approach and briefly explain why such a revised budget should be prepared. (6 marks)
2. Calculate the following:

1. Raw material total cost variance
2. Direct labor total cost variance
3. Fixed overhead efficiency variance
4. Fixed overhead capacity variance
5. Fixed overhead expenditure variance (8 marks)

3. Suggest possible explanations for the following variances

1. Raw materials total cost variance
2. Fixed Overhead efficiency variance
3. Fixed overhead expenditure variance (6 marks)