The following is a Level 2 analysis that presents a flexible-budget variance and a sales-volume variance of each direct cost category
Business & ManagementMarketingCase Study
Bryant Company’s budgeted prices for direct materials, direct manufacturing labor, and direct marketing (distribution) labor per attaché case are $43, $6, and $13, respectively. The president is pleased with the following performance report:
Actual output was 10,000 attaché cases. Assume all three direct-cost items shown are variable costs. 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 $473,000 in the static budget ÷ budgeted direct materials cost per attaché case of $43.
The following is a Level 2 analysis that presents a flexible-budget variance and a sales-volume variance of each direct cost category.
🔒
Unlock the complete assignment
You are viewing the free preview. Purchase this assignment once to reveal the complete resource.
$9.99 USD
Secure checkout is completed by Stripe.
Variance Analysis for Bryant Company
Actual Results (1)
Flexible- Budget Variances (2) = (1) – (3)
Flexible Budget (3)
Sales- Volume Variances (4) = (3) – (5)
Static Budget (5)
Output units Direct materials Direct manufacturing labor Direct marketing labor Total direct costs
10,000 $438,000 63,600 133,500 $635,100
0 $ 8,000 U 3,600 U 3,500 U $15,100 U
10,000 $430,000 60,000 130,000 $620,000
1,000 U $43,000 F 6,000 F 13,000 F $62,000 F
11,000 $473,000 66,000 143,000 $682,000
$15,100 U
$62,000 F
Flexible-budget variance
Sales-volume variance
$46,900 F
Static-budget variance
The Level 1 analysis shows total direct costs have a $46,900 favorable variance. However, the Level 2 analysis reveals that this favorable variance is due to the reduction in output of 1,000 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:
Actual
Budgeted
Units Direct materials Direct manufacturing labor Direct marketing labor
10,000 $ 43.80 $ 6.36 $ 13.35
11,000 $ 43.00 $ 6.00 $ 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.