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    Budget Variance

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    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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