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- January 13, 2021 at 3:28 pm #605725
Hi!

Could you please help me with the following question.

Chateau Larnaque has a bottling plant for its drinks and has prepared flexible budgets

Bottles: 10,000 / 12,000 / 14,000

Production costs:

Materials: 30,000 / 36,000 / 42,000

Labour: 27,000 / 31,000 / 35,000

Overhead: 20,000 / 20,000 / 20,000Actual production was 12,350 bottles and the production costs incurred totalled $90,000.

What is the meaningful total variance for performance evaluation purposes? (answer: $1250 adverse)

The answer

Materials: Variable costs = $3/unit

Overhead: Fixed cost = $20,000

Labour: (high low method)Output / Cost

14,000 / 35,000

10,000 / 27,0004,000 / 8,000

VC/unit. $2

By substitution into high output:

Total VC: $28,000

Total FC: $35,000 – $28,000 = $7000Flexed budgeted costs:

Materials (12,350 x 3) = $37,050

Labour (7000 + 2 * 12,350) = $31,700

OH 20,000

Total $88,750Actual costs – Flexed budgeted costs = 1250 (A)

I don’t understand every part how I get to this answer. To get $28,000 (total VC) do I multiply this $2 VC/unit with output 14,000? I don’t understand the logic behind this. Why do I multiply it with the high output figure and not the lower for example?

Thank you for your help

January 14, 2021 at 8:21 am #605767I assume that you are happy with the calculation of the variable cost per unit of $2.

To get the fixed cost you can do the calculation at any of the three levels.

At 10,000 units, the total cost is $27,000. The variable cost is 10,000 units x $2 = $20,000. Therefore the fixed cost is 27,000 – 20,000 = $7,000.

Or do it for 12,000 units. The total cost is $31,000. The variable cost is 12,000 x $2 = $24,000. Therefore the fixed cost is 31,000 – 24,000 = $7,000

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