Task $1$

Eregon Construction manufactures a generator that they sell wholesale to building suppliers.

The budget for the quarter ended September was for $20000$ units. Actual output was $19200$ units.

The standard cost per unit includes:

Material

R$1500$

Light, heat and power

R$40$

Fixed overheads

R$22$

Material is a variable cost. Light, heat and power is a semi$-$variable cost. The budgeted fixed element is R$340000.$ Fixed overheads are absorbed based on labour hours.

The variances were calculated by comparing the budgeted costs $($for $20000$ units$)$ to the actual cost for the actual output. The production manager is very pleased with the results as all the variances are favourable:

Variance

R

Material

$934000$ F

Light, heat and power

$792000$ F

Fixed overheads

$2000$ F

Write an email to the production manager to explain the need for flexing the budget before calculating the variances. Include the following in your explanation:

$-$ how each of the above elements will be adjusted for the flexed budget, based on the nature of the cost;

$-$ whether each variance will still be favourable when compared to the flexed budget.

$(25)$