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Horngren'S Financial And Managerial Accounting
Found in: Page 1305

Short Answer

Question: What are the two components of the static budget variance? How are they calculated?

Answer

Static budget variance is calculated by summing up the sales volume and flexible budget variance.

See the step by step solution

Step by Step Solution

Step 1: Definition of Budgeting

The process under which the business entity estimates the level of activity a business entity wishes to achieve through business operation is known as budgeting. It includes the estimation of revenue and expenses.

Step 2: Two components of static budget variance

The two components of the static budget variance include:

  1. Flexible budget variance: Calculation is as follows

    Particular

    Amount $

    Actual results

    xxx

    Less: Flexible budget

    (xxx)

    Flexible budget variance

    xxx

    1. Sales volume variance: Calculation is as follows
    2. Particular

      Amount $

      Actual results

      xxx

      Less: Flexible budget

      (xxx)

      Flexible budget variance

      xxx

Most popular questions for Business-studies Textbooks

Computing and journalizing standard cost variances

Middleton manufactures coffee mugs that it sells to other companies for customizing with their own logos. Middleton prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:

Direct Materials (0.2 lbs. @ $0.25 per lb.) $ 0.05

Direct Labor (3 minutes @ $0.14 per minute) 0.42

Manufacturing Overhead:

Variable (3 minutes @ $0.06 per minute) $ 0.18

Fixed (3 minutes @ $0.13 per minute) 0.39 0.57

Total Cost per Coffee Mug $ 1.04

Actual cost and production information for July 2018 follows:

a. There were no beginning or ending inventory balances. All expenditures were on account.

b. Actual production and sales were 62,500 coffee mugs.

c. Actual direct materials usage was 11,000 lbs. at an actual cost of $0.17 per lb.

d. Actual direct labor usage of 197,000 minutes at a cost of $33,490.

e. Actual overhead cost was $10,835 variable and $29,965 fixed.

f. Selling and administrative costs were $130,000.

Requirements

1. Compute the cost and efficiency variances for direct materials and direct labor.

2. Journalize the purchase and usage of direct materials and the assignment of direct

labor, including the related variances.

3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production from Work in Process Inventory. Journalize the adjusting of the Manufacturing Overhead account.

5. Middleton intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

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