Actual output was 9,800 attaché cases. Assume all three direct- cost items shown are variable costs — Harvin Company budgeted prices for materials manufacturing labor and

Harvin Company’s budgeted prices for direct materials, direct manufacturing labor, and direct marketing (distribution) labor per attaché case are $ 37, $ 9, and $ 13, respectively. The president is pleased with the following performance report:

.:.

Actual output was 9,800 attaché cases. Assume all three direct- cost items shown are variable costs.

Required

Is the president’s pleasure justified? Prepare a revised performance report that uses a flexible budget and a static budget.

SOLUTION:

The existing performance report is a Level 1 analysis, based on a static budget. It makes no adjustment for changes in output levels. The budgeted output level is 11,000 units––direct materials of $407,000 in the static budget ÷ budgeted direct materials cost per attaché case of $37.

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The following is a Level 2 analysis that presents a flexible-budget variance and a sales-volume variance of each direct cost category.

Variance Analysis for Harvin Company

				Flexible-	Flexible-					Sales-
	Actual	Actual		Budget	Budget	Flexible	Flexible	Flexible		Volume	Volume	Static	Static
	Results	Results		Variances	Variances	Budget	Budget	Budget		Variances	Variances	Budget	Budget
	(1)	(1)	(2) = (1) – (3)	(2) = (1) – (3)	(2) = (1) – (3)		(3)		(4) = (3) – (5)	(4) = (3) – (5)	(4) = (3) – (5)	(5)	(5)
Output units	9,800	9,800	0	0			9,800		1,200	1,200	U	11,000	11,000
Direct materials	$373,000	$373,000		$10,400	U	$362,600	$362,600			$44,400	F	$407,000	$407,000
Direct manufacturing labor	97,200	97,200	9,000	9,000	U		88,200		10,800	10,800	F	99,000	99,000
Direct marketing labor	133,000	133,000	5,600	5,600	U	127,400	127,400		15,600	15,600	F	143,000	143,000
Total direct costs	$603,200	$603,200		$25,000	U	$578,200	$578,200		$70,800	$70,800	F	$649,000	$649,000
				$25,000 U	$25,000 U					$70,800 F	$70,800 F
		Flexible-budget variance	Flexible-budget variance	Flexible-budget variance	Flexible-budget variance	Flexible-budget variance	Sales-volume variance	Sales-volume variance	Sales-volume variance	Sales-volume variance	Sales-volume variance
						$45,800 F	$45,800 F	$45,800 F
					Static-budget variance	Static-budget variance	Static-budget variance	Static-budget variance	Static-budget variance	Static-budget variance

The Level 1 analysis shows total direct costs have a $45,800 favorable variance. However, the Level 2 analysis reveals that this favorable variance is due to the reduction in output of 1,200 units from the budgeted 11,000 units. Once this reduction in output is taken into account (via a flexible budget), the flexible-budget variance shows each direct cost category to have an unfavorable variance indicating less efficient use of each direct cost item than was budgeted, or the use of more costly direct cost items than was budgeted, or both.

Each direct cost category has an actual unit variable cost that exceeds its budgeted unit cost:

Units	Actual	Actual		Budgeted	Budgeted
Units		9,800		11,000	11,000
Direct materials	$	38.06	$	$	37.00
Direct manufacturing labor	$	9.92	$	$	9.00
Direct marketing labor	$	13.57	$	$	13.00

Analysis of price and efficiency variances for each cost category could assist in further the identifying causes of these more aggregated (Level 2) variances.