Question

ABC Company had the following budget for November 2018:

Budgeted Contribution Income Statement

November 2018

Sales (1,800 units) $450,000

Less variable costs:

Variable cost of goods sold :

Direct materials (10 ounces / unit) $90,000

Direct labor (1.2 labor hours / unit) $36,000

Manufacturing overhead (0.25 machine hours / unit) $27,000

Total COGS $153,000

Selling (based directly on units) $108,000

Total Variable costs $ 261,000

Contribution margin $ 189,000

Less fixed cost

Manufacturing overhead $80,000

Selling $60,000

Administrative $21,000

Total Fixed costs $61,000

Net income $28,000

Earlier in the year, demand for their product increased sharply. They raised the price some in an attempt to optimize profitability. Acquiring additional materials was not a big problem. In fact, their supplier was happy to see them raise their quantity per order. Conversely, labor was a more difficult problem. The community around the plant had low unemployment and a fairly stable population. Thus, the only option was to offer the current employees overtime at 1.5 times their normal hourly wage. And, the only option with the machinery was to run it more hours and "baby" it so that it would not breakdown.

Overall the results at the end of the month looked pretty good:

Actual Contribution Income Statement

November 2018

Sales (2,500 units) $687,500

Less variable costs

Variable cost of goods sold

Direct materials (25,500 ounces) $125,000

Direct labor (3,200 labor hours) $ 57,500

Manufacturing overhead (550 machine hours) $ 48,750

Total variable costs $231,250

Selling (based directly on units) $188,000

$419,250

Contribution margin $268,250

Less fixed cost

Manufacturing overhead $ 78,000

Selling $ 75,000

Administrative $ 23,000

Total fixed costs $ 176,000

Net income $92,250

Your job is to prepare for a meeting between the owner and the president of ABC Company. The owner has asked you to be ready to describe all differences between budgeted and actual numbers.

Variance Amount Concise Explanation for the Owner

Total Volume Variance in terms of Net Income

Sales Price Variance

Direct Materials Efficiency Variance

Direct Materials Price Variance

Direct Labor Efficiency Variance

Direct Labor Rate Variance

Variable Manufacturing Overhead Efficiency Variance

Variable Manufacturing Overhead Spending Variance

Variable Selling Spending Variance

Fixed Manufacturing Overhead Spending Variance

Fixed Selling Spending Variance

Fixed Administrative Spending Variance

Note: The sum of all variances should be the $64,250 Favorable difference between Budgeted and Actual Net Income.

Step-by-step answer

Sum of all variances = $64,250

Explanation:

Total Volume Variance = [Actual sales - Budgeted Sales] * Budgeted Price

= [2,500 - 1,800] * [$450,000 / 1,800] = $175,000 (favorable)

Sales price variance = [Actual price - Budgeted price] * Actual Volume

= [($687,500 / 2,500) - ($450,000 / 1,800)] * 2,500 = $62,500 (favorable)

Direct Material Efficiency Variance = [Standard quantity - Actual quantity] * Standard cost

= [(1,800 * 10) - 25,500] * [90,000 / 18,000] = 37,500 (unfavorable)

Direct Material Price Variance = [Standard price - Actual price] * Actual quantity

= [$5 - ($125,000 / 25,500)] * 25,500 = $2,500 (favorable)

Direct Labor Efficiency Variance = [Standard hours - Actual hours] * Standard rate

= [(1,800 * 1.20) - 3,200) * [$36,000 / 2,160] = $17,333.33 (unfavorable)

Direct Labor Rate Variance = [Standard rate - Actual rate] * Actual quantity

= [$16.66667 - ($57,500 / 3,200)] * 3,200 = $4,166.67 (unfavorable)

Variable Manufacturing Overhead Efficiency Variance = [Standard quantity - Actual quantity] * Standard rate

= [450 - 550] * [$27,000 / 450] = $6,000 (unfavorable)

Variable Manufacturing Overhead Spending Variance = [Standard rate - Actual rate] * Actual Quantity

= [60 - ($48,750 / 550)] * 550 = $15,750 (unfavorable)

Variable Selling Spending Variance = Standard variable selling costs - Actual variance selling costs

= $108,000 - $188,000 = $80,000 (unfavorable)

Fixed Manufacturing Overhead Spending Variance = Budgeted fixed manufacturing overhead - Actual fixed manufacturing overhead

= $80,000 - $78,000 = $2,000 (favorable)

Fixed Selling Spending Variance = Budgeted fixed selling costs - Actual fixed selling costs

= $60,000 - $75,000 = $15,000 (unfavorable)

Fixed Administrative Spending Variance = Budgeted fixed administrative costs - Actual fixed administrative costs

= $21,000 - $23,000 = $2,000 (unfavorable)

Sum of all variance = $175,000 + $62,500 - $37,500 + $2,500 - $17,333.33 - $4,166.67 - $6,000 - $15,750 - $80,000 + $2,000 - $15,000 + $2,000

= $64,250 (favorable)

What is the concise explanation for each answer for the differences in variances? What does the unfavorable variable selling spending variance mean?