Question

McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The? company's performance report includes the following selected? data:

							Static Budget	Actual Results
							(1,000 recliners)	(980 recliners)
Sales		(1,000 recliners x			$500	each)	$500,000
		(980 recliners x			$475	each)		$465,500
Variable Manufacturing Costs:
Direct Materials		(6,000 yds. @			$8.50	/ yd.)	51,000
		(6,143 yds. @			$8.30	/ yd.)		50,987
Direct Labor		(10,000 DLHr @			$9.30	/ DLHr)	93,000
		(9,600 DLHr @			$9.40	/ DLHr)		90,240
Variable Overhead		(6,000 yds. @			$5.20	/ yd.)	31,200
		(6,143 yds. @			$6.60	/ yd.)		40,544
Fixed Manufacturing Costs:
Fixed Overhead							60,600	62,600
Total Cost of Goods Sold							235,800	244,371
Gross Profit							$264,200	$221,129

1.	Prepare a flexible budget based on the actual number of recliners sold.
2.	Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing? overhead, compute the variable overhead? cost, variable overhead? efficiency, fixed overhead? cost, and fixed overhead volume variances. Round to the nearest dollar.
3.	Have McKnight?'s managers done a good job or a poor job controlling?materials, labor, and overhead? costs? Why?
4.	Describe how McKnight?'s managers can benefit from the standard costing system.

Answer 1

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Par-1. Flexible Budget
	Working	Flexible Budget (980 Recliners)
Sales	980*500	490000
Variable Manufacturing Cost:
-Direct Material	6143*8.5	52216
-Direct Labor	9600*9.3	89280
-Variable Overhead	6143*5.2	31944
Fixed Manufacturing Cost:
-Fixed Overheads		60600
Total Cost of Goods Sold		234039
Gross Profit		255961
Part 2: Variances
				F/N
Material Price Variance		6143*(8.30-8.50)	1229	Favorable
Material Quantity Variance		8.5*(6143-6000/1000*980)	2236	Unfavorable
Labor Price Variance		9600*(9.40-9.30)	960	Unfavorable
Labor Efficiency Variance		9.3*(9600-10000/1000*980)	1860	Favorable
Variable Ovh Rate Variance		6143*(6.60-5.20)	8600	Unfavorable
Variable Efficiency Variance		5.2*(6143-6000/1000*980)	1368	Unfavorable
Fixed Overhead Rate Variance		62600-60600	2000	Unfavorable
Fixed Overhead Volume Variance		60600-(980*60600/1000)	1212	Unfavorable
(Budgeted-Allocated)
Part-3
Manager have done reasonably good job in controllng Material and Labor cost as unfavorable variance is being almost offset by favorable variance in these two cases.
However, manager could have done better in case of controlling Overhead cost where we have unfavorable variance only for Rate and Volume.
Part-4
Standard help Managers/Employee to know the target level.
Knowing the target wil help to control the cost.
Standard help management to plan by setting unit cost which in return will help to prepare flexible and static budget