Self-Study Problem 14-1 Sales Volume and Flexible-Budget (FB) Variances/JIT Manufacturing

This is the full question:

Solid Box Fabrications manufactures boxes for workstations. The firms standard cost sheet prior to October of the current year and actual results for October are as follows:

	Budget Information
	Standard Price and Variable Costs per Unit				Fixed Costs				Actual Results October
Units										10,200
Sales	$	50.00							$	592,000
Variable costs:
Direct materials
5 pounds at $2.50 per pound	$	12.70						51,100 lb* $3 =	$	153,300
Direct labor
0.50 hour at $15.40 per hour		7.70						5,150 hr $17.60 =		90,640
Manufacturing overhead		2.00								19,000
Selling and administrative		5.00								55,100
Total variable costs	$	27.40							$	318,040
Contribution margin	$	22.60							$	273,960
Fixed costs:
Manufacturing (factory) overhead					$	59,000			$	55,000
Selling and administrative						20,000				24,000
Total fixed costs					$	79,000			$	79,000
Operating income									$	194,960

*Assume that pounds purchased = pounds issued to production (i.e., a JIT inventory policy).

In preparing the master budget for October, the firm recognized that several items on the standard cost sheet were expected to change. For example, the selling price of the product was expected to increase by 8%. Suppliers have notified the firm that starting October 1, materials prices would be 5% higher. The labor contract prescribes a 10% increase, starting October 1, on wages and benefits. Fixed manufacturing costs were expected to increase $5,000 for insurance, property taxes, and salaries. Fixed selling and administrative costs were expected to increase as follows: $2,000 in managers salaries and $2,000 for advertising during October. The unit sales for October were expected to be 11,400 units. Solid Box Fabrications uses a JIT approach in all of its operations, including materials acquisitions and product manufacturing.

Part 1

Required:

1. Prepare the master (static) budget and pro forma budgets for 10,200 units and 11,700 units for October.

2. Calculate and label as favorable or unfavorable the master (static) budget variance (total operating-income variance) for October. Break this variance down into the sales volume variance and the total flexible-budget variance for the period.

3. Compute and label as favorable or unfavorable each of the following variances for October: selling price variance, total variable cost flexible-budget (FB) variance, and total fixed cost variance.

4. Break down the total direct materials flexible-budget variance and the total direct labor flexible-budget variance into their price (rate) and quantity (efficiency) components. Label each component variance as favorable or unfavorable.