MASTER BUDGET AND FLEXIBLE BUDGET

In this example, Table 1 provides all the basic information about the
standard costs and unit price, assumed in order to construct the master budget.
The origin of this information is usually the recent experience with
providers and expert knowledge of their own processes.
Pay special attention to the fact that some come in kg, others in hr (hours) and still
others come expressed in combined units, such as kg/unit. Here, the word "unit"
refers to one unit of the finished product.
TABLE 1. INPUT DATA FOR THE MASTER BUDGET
Units 11,800
Price 1 unit $ 68.00
Raw material 1.8 kg/unit $ 2.40
Direct labor 2 hr/unit $ 7.50
Indirect manfct 1 unit $ 2.80
Overhead $ 265,000

TABLE 2. ACTUAL RESULTS

These values correspond to the actual outcome at period's end.
They are data as reported by the cost accountant.
The number of units actually sold is in red. And this is the
number of units that guide the construction of the flexible budget
Units 11,200
Hours direct labor 20,426
Price/unit $ 70
Raw material $ 51,744
Raw material/Kg $ 2.80
Direct labor $ 155,238
Indirect manfct $ 32,640
Overhead $ 277,000
 TABLE 3. BUDGETARY ANAYSIS OF VARIANCE
All data in the 'Standard costs' column have been given per unit
of the finished product. Check the cells in each column, and gain understanding by reviewing h
each cell was computed, using the data in tables 1 and 2.
VARIANCE COMPARISON SHOULD BE MADE BETWEEN THE FLEXIBLE BUDGET AND THE ACTUA
Standard costs Master budget
Units 11,800
Revenue $ 68.00 802,400
/kg Raw material $ 4.32 (50,976)
/hr Direct labor $ 15.00 (177,000)
/unit Indirect manfct $ 2.80 (33,040)

Total contribution 541,384

Overhead (265,000)

Operating income 276,384

TABLE 4. EXAMPLE OF ANALYSIS OF VARIANCE: THE CASE OF RAW MA

NOTATION
RA: ACTUAL COST PER KG =
RF: COST PER KG ACCORDING TO THE FLEXIBLE (OR MASTER) BUDGET
QA: ACTUAL QUANTITY IN KG USED IN PRODUCTION OF UNITS SOLD
QF: QUANTITY IN KG ACCORDING TO FLEXIBLE BUDGET =
DEFINITIONS
Spending variance = QA*(RA - RF)
Efficiency variance = RF*(QA - QF)
Total variance (material)
d gain understanding by reviewing how

FLEXIBLE BUDGET AND THE ACTUAL RESULTS

Flexible budget Actual results Variance %Variance
11,200 11,200
761,600 784,000 22,400 2.9% FAVORABLE
(48,384) (51,744) (3,360) 6.9% NOT FAVORABLE
(168,000) (155,238) 12,762 -7.6% FAVORABLE
(31,360) (32,640) (1,280) 4.1% NOT FAVORABLE

513,856 544,378 30,522 FAVORABLE

(265,000) (277,000) (12,000) 4.5% NOT FAVORABLE

248,856 267,378 18,522 FAVORABLE

F VARIANCE: THE CASE OF RAW MATERIAL

$ 2.80
HE FLEXIBLE (OR MASTER) BUDGET = $ 2.40
IN PRODUCTION OF UNITS SOLD = 18,480
O FLEXIBLE BUDGET = 20,160
Comments:
$ 7,392.00 Material turned out to be more expensive than budgeted
($ 4,032.00) Manufacture used less material than budgeted
$ 3,360.00 Conclusion: overcosts were more significant than efficiency savings
 why?
why?

fficiency savings