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Calculate the flexed flexible budget & key variances

A consulting firm produces a service that requires the use of labor and materials. Each unit of service requires a standard labor time of 30 minutes (0.5 hours). The average pay rate for a labor hour is £20. The consulting firm considers all materials that are required for the service as variable overheads (OH), the cost of which is directly associated with the labor hours worked. It has been estimated that variable OH rate is £10 per service hour.
The budgeted and actual costs, revenue and units for the month November are given in the table below:
Original Budget Actual
Units of Service 1,500 1,600
Sales Revenue £120,000 £124,400
Labor hours 750 860
Labor cost £15,000 £20,210
Variable OH costs £7,500 £8,170
Fixed Cost £68,000 £68,000
Total Cost £90,500 £96,380
Operating Profit £29,500 £28,020

1. Calculate the flexed budget and the key variances between budgeted and actual results.

2. Reconcile the original budget and present the relationship between the budgeted and the actual profit for the month November

3. Discuss the calculated variances, and provide suggestions for better cost management (target length 300 words).

Solution Preview

1. For this step, you have to figure out what the per unit is by using the original budget. See excel for the "per unit" column. Then, using this per unit information, you can create the flexible budget. This is a budget updated for the actual units of service. So, the original budget was based on 1,500 but the flexible budget is what the original budget would have been if the activity as 1,600.

Using the new "flexed budget" you can now compare the actual costs to what the budget should have been if you knew the level of activity at budget time. As you see from excel, attached, the two biggest issues were the sales prices were below plan and the labor costs were above plan.

2. See excel, attached.

3. The variances show that the profit is only slightly lower. But that is confusing since they sold 100 more units of service than originally planned.  So, why didn't profits improve with the higher activty? The best ...

Solution Summary

Your tutorial is 459 words plus two schedules in Excel, one flexible budget analysis and one reconciliation of budgeted profits to actual profits showing the labor and variable overhead variances broken down by price and efficiency portions.

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