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Imran says

Sir, tomorrow is my exam please HELP!

how can we find out the total expenditure and volume variances in budgeting?

Budget Actual

Sales(units) 120000 100000

Sales revenue 1200000 995

Variable printing cost 360000 280000

Variable O/H’s 60000 56000

Fixed.prod.cost 300000 290000

Fixed.admin.cost 360000 364000

Profit 120 5

Find out the total expenditure and volume variances.

please do explain how we do it.

Imran says

The actual SALES revenue is $995000 not 995

John Moffat says

Are you sure the question only says “Find out the total expenditure and volume variances”?

(because that could mean more than one thing)

Imran says

yes sir, i am sure it’s on kaplan kit Budgeting chapter page no. 62 and question no. 206.

John Moffat says

The volume variance is the difference between the original budget profit and the flexed budget profit.

The original budget profit is 120,000. If you flex the budget for sales of 100,000 units, you get a flexed profit of (10,000) (I.e. a loss of 10,000). So the volume variance is 110,000 (adverse)

The expenditure variance is the difference between the flexed budget profit and the actual profit. The flexed profit is a loss of (10,000); the actual profit is 5,000 and so the variance is 15,000 (favourable).

(This question is a bit naughty of Kaplan. Firstly because it should really be in the variances section rather than the budget section, and secondly because ‘expenditure’ variance isn’t really the correct name.)

Erica says

Sir, how to work this out?

A company manufactures a single product. Budgeted production for the first three months of next year is as follows :

Month 1 :8k units

Month 2 : 9k units

Month 3 : 7k units

Each unit uses 4kg of raw material costing $5 per kg. The budgeted raw material inventory at the end of each month is to be 20% of the following months production.

What are the budgeted raw material purchases for month 2 of next year (in $’s)?

(answer is $172,000)

John Moffat says

Opening inventory for month 2 = 20% x 9,000 = 1,800

Closing inventory for month 2 = 20% x 7,000 = 1,400

So production in month 2 = 9,000 + 1,400 – 1,800 = 8,600

So raw materials = 8,600 x 4 a 5 = $172,000

Erica says

Why did you add 1,400 units (c/inventory) to the production of month 2?

John Moffat says

We sell 9,000. We start with 1800 in inventory, so that means we only need to produce 9000 – 1800. However we would then end up with no inventory at the end, but we want to have 1400 in inventory, so we need to make an additional 1400.

Sales units are always equal to opening inventory + production – closing inventory.