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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
I 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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