Managerial Accounting

Module 7 Review Questions

I. Preparation of flexible budgets

Mesa Company’s fixed budget for the first quarter of calendar year 2011 reveals the following. Prepare flexible budgets, following the format of Exhibit 8.3, that show variable costs per unit, fixed costs, and three different flexible budgets for sales volumes of 7,500, 10,000, and 12,500 units.

II. Computation and interpretation of labor variances

After evaluating Zero Company’s manufacturing process, the management decided to establish standards of 1.5 hours of direct labor per unit of product and $11 per hour for the labor rate. During October, the company used 3,780 hours of direct labor at $45,360 total cost to produce 2,700 unit of product. In November, the company used 4,480 hours of direct labor at a $47,040 total cost to produce 2,800 units of product.

1. Compute the labor rate variance, the labor efficiency variance, and the total direct labor cost variance for October and for November.

October Actual direct labour hours (AH) = 3,780 hours

October Actual labour rate (AR) = $12

November Actual direct labour hours (AH) = 4,480 hours

November Actual labour rate (AR) = $10.50

October Standard direct labour hours (SH) = 4,050 hours

November Standard direct labour hours (SH) = 4,200 hours

Standard labour rate (SR) = $11

2. Interpret the October direct labor variances.

The analysis shows that there is a $2,970 favourable efficiency variance results from using 270 fewer direct labour hours compared to the standard hours needed, but this favourable variance is insufficient to offset due to the wage rate that is $1.00 per hour higher than standard. Therefore total labour cost variance is $810 unfavourable.

III. Computation and interpretation of materials variances

BTS Company made 6,000 bookshelves using 88,000 board feet of wood costing $607,200. The

Company’s direct materials standards for one bookshelf are 16 board feet of wood at $7 per board...