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Budget Variance

The production costs for product ABC are as follows:

Direct Labor $6.00 per unit 20 minutes of labor
Raw materials $15.00 per unit 1 pounds of raw material
Variable Overhead $3.00 per unit 50% of direct labor cost
Fixed Overhead $120,000

a) Assume that the company is planning on producing 100,000 units of ABC. Prepare the production cost budget for this product.

b) The company produced only 98,000 units of ABC and incurred the following actual costs:

Direct Labor $735,000
Raw materials $1,372,000
Overhead $367,500

Prepare a budget variance report using a flexible budget.

c) You did a little research and discovered that the direct labor wage rate is fixed by union contract. What do you think caused the variances and how would you test your hypotheses?

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