Worked example 1
Flexi Ltd has a fixed budget based on producing 8,000 units. Actual production was 9,000 units. The company's standard costs are: Direct materials $10 per unit, Direct labour $15 per unit. Budgeted fixed overheads are $60,000 per period. Actual costs for the period were: Direct materials $92,000, Direct labour $138,000, Fixed overheads $63,000.
Required:
- Prepare a flexible budget for the actual activity level of 9,000 units.
- Calculate the cost variances for each element and the total variance.
Show solution outline
1. Flexible Budget Preparation (for 9,000 units)
First, we calculate the budgeted cost for the actual level of activity.
- Direct Materials: 9,000 units * $10/unit = $90,000
- Direct Labour: 9,000 units * $15/unit = $135,000
- Fixed Overheads: $60,000 (Fixed costs do not change with activity level within the relevant range)
Total Flexible Budget Cost = $90,000 + $135,000 + $60,000 = $285,000
2. Variance Calculation
We compare the flexible budget with the actual costs. Variance = Actual Cost - Flexible Budget Cost
| Cost Element | Flexible Budget ($) | Actual Cost ($) | Variance ($) |
|---|---|---|---|
| Direct Materials | 90,000 | 92,000 | 2,000 Adverse (A) |
| Direct Labour | 135,000 | 138,000 | 3,000 Adverse (A) |
| Fixed Overheads | 60,000 | 63,000 | 3,000 Adverse (A) |
| Total | 285,000 | 293,000 | 8,000 Adverse (A) |
Final Answer: The total cost variance is $8,000 Adverse. This means the company spent $8,000 more than it should have for producing 9,000 units.