Smithton, Inc. makes and sells one product, the standard costs of which are as follows:
Direct materials (2 kg at 3.00/kg) = 6.00
Direct labour (30 minutes at 10.00/hr) = 5.00
Fixed overheads = 2.50
Total = 13.50
Selling price = 20.00
Standard profit margin = 6.50
The monthly production and sales are planned to be 1,300 units.
The actual results for May were as follows:
Sales revenue = 20,000
Less: Direct materials = (6,500) (2,100 kg)
Direct labour = (5,250) (510 hr)
Fixed overheads = (3,100)
Operating profit = 5,150
There were no inventories at the start or end of May.
Your supervisor has asked you to calculate the budgeted profit for May and then reconcile it to the actual profit through variances, going into as much detail as possible from the information available.
Once you have the figures computed, prepare a detailed report for your supervisor that includes a discussion of the following information:
- A listing of the variances that occurred within the month of May.
- An analysis of the standards developed and utilized by the organization.
- An analysis of each variance with regards to the possible explanations of why it occurred.
- An analysis of the business/strategic implications that exist for your organization in light of the new information.
Attached in Excel you will find several analyses that will explain May's results to you. First, production and sales are well below plan. The budget expected we would make and sell 1,300 units but we made and sold 1,000. Given that our activity is below plan, we would expect costs to be well below plan too. So, looking at actual expenses versus the static budget, or the budget set at the start of the year, gives positive variances except for sales:
(see attached for report)
However, the best way to study the month is to adjust the static budget to reflect the actual production and ...
This tutorial is 547 words which includes three reports, a static budget versus actual, a flexible budget versus actual, and a variance analysis of direct material and direct labor showing the price variance, usage variance, rate variance, and efficiency variances. Some implications of the variances are discussed to help you understand the activity and results and get you started on your own report.