Youre the controller at X Corp Your accounting staff has jus

You\'re the controller at X Corp. Your accounting staff has just provided you with a list of variance calculations that you requested. Unfortunately, they forgot to calculate some variances that you wanted, and even worse, they neglected to provide you with the original budget data that you also requested. It\'s 8 PM, and everyone has gone home already. You have an actual income statement and have scrounged your desk to find some information on standards that the company used in developing the budget. You need to prepare a presentation for tomorrow morning and don\'t want to admit that you can\'t find your own budget. You resolve to reconstruct it.

Variances

Income Statement

Materials price variance

6,000 U

Revenue

$450,000

Labor efficiency variance

4,000 F

(100,000 units sold)

Maintenance variance

2,000 U

Supervision variance

5,000 F

Materials

120,000

Industry volume variance

10,000 F

(30,000 lbs.)

Sales mix variance

8,000 U

Direct labor

70,000

(3,200 hours)

Maintenance

80,000

                     Standards

Supervision

50,000

Depreciation

60,000

Sales price

$4.25 / unit

Materials usage

0.33 lbs / unit

Total expenses

380,000

Direct labor wage

$20 / hour

Net income

70,000

/.

Depreciation and supervision are fixed costs; the others are variable. Depreciation was known with certainty at the time of budgeting for all pre-existing PP&E. The company bought a new machine during the year that added an unexpected $4,000 to depreciation. The company’s market share for the year was 1%, but had been budgeted to be 1.2%.

a) Reconstruct the original budgeted income statement.

b) The purpose of tomorrow\'s meeting is to discuss your strategy for variance investigation. Your staff is small, and you can only adequately investigate two variances. Which two will you pick, and why? Note that you are in no way constrained by the selection of variances provided above by your staff. You can choose any variance to investigate, after you have calculated it. Please keep your explanations brief.

Variances			Income Statement
Materials price variance	6,000 U		Revenue	$450,000
Labor efficiency variance	4,000 F		(100,000 units sold)
Maintenance variance	2,000 U
Supervision variance	5,000 F		Materials	120,000
Industry volume variance	10,000 F		(30,000 lbs.)
Sales mix variance	8,000 U		Direct labor	70,000
			(3,200 hours)
			Maintenance	80,000
Standards			Supervision	50,000
			Depreciation	60,000
Sales price	$4.25 / unit
Materials usage	0.33 lbs / unit		Total expenses	380,000
Direct labor wage	$20 / hour		Net income	70,000

Solution

a) COMPUTATION OF BUDGTED INCOME STATEMENT Here we will compute budget cost by taking one by one cost 1 Material: Actual Qty= 30000 Actual cost= 120000 cost per lbs 4 Budgted qty usage 0.33 lbs/unit standard qty = 100000*.33 33000 material price variance = AQ* (SP-AP) .+ 30000* (sp-4) = -6000 sp= 3.8 0.2 Standard cost = 125400 2 DIRECT LABOUR Actual Labour= 3200 Actual cost= 70000 cost per hour 21.875 Standard labour cost per hour 20 Labour efficiency usage= SR * (SH-AH) .+20*(SH-3200) = 4000 SH = 3400 Standard labour cost 68000 3 BUDGTED SALES Actual QTY sold 100000 revenue 450000 selling price per unit` 4.5 budgted selling price per unit 4.25 Sales mix variance= BP * (BQ-AQ) .+4.25*(BQ-100000) = -8000 BQ= 98118 Budgted sales = 98118*4.25 417001.5 BUDGTED INCOME STATEMENT PARTIUCLARS AMOUNT REVENUE 417000 MATERIAL 125400 LABOUR 68000 MAINTENANCE = 80000-2000 78000 SUPERVISION = 50000+5000 55000 DEPRECIATION = 60000-4000 56000 TOTAL EXPENSES 382400 BUDGTED PROFIT 34600 b) I will select material and labour variances here. Because it will cover entire major portion in the organisation In the material variance material price variance = 6000 unfavourable materail usage variance = SP * (SQ-AQ) = 3.8 * (33000-3000) = 11400 favourable even though price variance is showing unfavourable usage variance has favourable difference only. in the labour variance Labour efficiency usage = 4000 favourable Labour rate variance = AH* (SR-AR) = 3200* (20-21.875) = 6000 UNFAVOURABLE even though efficiency variance is showing unfavourable price variance has favourable difference only.