Problem 2: Budgeting and Variance Analysis Higgins Inc. is a manufacturer of disinfectant wipes. It sells disinfectant wipes in packs of 75 each. For the month of December, Higgins Inc. expects to make 500,000 packs of which it expects to sell 480,000 at a price of $5/pack. Higgins Inc. budgeted the following costs for the month of December: Variable Cost Fixed Cost/month Manufacturing Costs $1/pack $750,000 S,G&A Expenses $0.5/pack $250,000 Actual records for the month of December reveal the following information: Revenues Total Manufacturing Costs S,G&A Expenses No. of packs produced No. of packs sold $2,400,000 $1,250,000 $500,000 520,000 500,000 Assume there is zero beginning inventory of disinfectant packs. a) Prepare actual, flexible and static budget income statements for December. (3 points) b) What is the flexible budget variance and volume variance for total Manufacturing costs and indicate if it is favorable or unfavorable? (1 point) c) To further investigate the variance in total manufacturing costs, Higgins Inc. determined that the budgeted direct labor rate was $15 per hour and expected production rate was 500 packs per hour. Actual direct labor rate was $16 per hour and actual production rate was 520 packs per hour. Compute price variance, efficiency variance and volume variance for direct labor costs and indicate whether each variance is favorable or unfavorable. (2 points) B D E F G I 1 1 Flexible Actual 520,000 500,000 2 3 Production 4 Sales Qty 5 Price ($/pack) 6 Variable Mfg Cost ($/pack) 7 Fixed Mfg Cost ($) 8 Total Mfg Cost ($) 9 Variable SG&A ($/pack) 10 Fixed SG&A ($) Budgeted 500,000 480,000 $5.00 $1.00 $750,000 $5.00 $1.00 $750,000 $1,250,000 $0.50 $250,000 $0.50 $250,000 11 Flexible Static Actual $2,400,000 12 a) Income Statement 13 Revenues 14 Cost of Goods sold 15 Gross Margin 16 S, G&A Expenses 17 Net Income $500,000 18 Flexible Static Actual $1,250,000 19 b) Mfg Cost 20 Total Mfg Costs 21 Flexible Budget Variance 22 Unfavorable(U)/Favorable(F) 23 Volume Variance 24 Unfavorable (Uy/Favorable(F) 25 26 c) Direct Labor Data 27 Wage Rate ($/hr) 28 Production per hour 29 Production Volume Budgeted 15 500 500,000 Actual 16 520 520,000 30 31 Actual Price Variance Std. Price Efficiency Var Flexible Volume Var Static 32 Direct Labor Cost 33 Unfavorable(U)/Favorable(F) 34 35