Question 4

You have been assigned for reviewing the actual and budgeted figures of the variable manufacturing overhead of the Furniture Division of BMC. The manager of the division argues there are no evident issues with the direct labour cost budget because the static-budget variance is often favourable, which proves the budgeting process works quite well. The manager also argues the employees at the production line of standard chairs are always highly efficient because of the consistently favourable efficiency variances.

Your analysis is for a specific month of the year, comparing the budgeted and actual figures. For the specific month of the year, each standard chair is budgeted to take 6 labour-hours. The budgeted hourly wage is $30. The budgeted number of standard chairs to be manufactured in this given month is 90.

Actual direct labour costs in the given month were $16,000 for 100 standard chairs started and completed. There was no opening or closing stock. Actual direct manufacturing labour-hours for this given month were 490.

1. b) Explain whether the management is correct or not regarding having a good budgeting process due to often having a favourable static-budget variance and a consistently favourable efficiency variance. Use your calculations for supporting your argument. (Chapter 15, 10 marks)