Nilbog Ltd makes garden gnomes. It uses standard costs and has budgeted to produce and sell 130,000 Fishermen (their top-of-the-range gnome) in 2010. Nilbog’s budget for the year is phased over 13 four-week periods, and production and sales revenues are spread evenly in the budget.

Question

Budgeted standard costs and selling prices for the Fisherman are:

		£
Direct materials	3 cubic metres at £3.60 per cubic metre	10.80
Direct labour	2 hours at £6.60 per hour	13.20
Variable overheads	2 hours at £2.40 per hour	4.80
Fixed overheads	2 hours at £4.80 per hour	[latex] \underline{9.60} [/latex]
Standard cost of one Fisherman		38.40
Standard profit		[latex] \underline{9.60} [/latex]
Standard selling price		[latex] \underline{48.00} [/latex]

The actual results for period five, a four-week period, were:

Revenue	9,000 Fishermen at £48 each
Production	9,600 Fishermen
Purchase of direct materials	30,000 cubic metres at a cost of £115,200
Direct materials usage	28,000 cubic metres
Direct labour cost	£142,560 for 22,000 hours
Variable overhead	£44,000
Fixed overhead	£100,000

There was no work-in-progress at the start or at the end of period five. Finished goods and materials inventories are valued at standard cost.

You are required to prepare a flexed budget and an operating statement for Nilbog Ltd for period five, showing the profit for the period and all standard variances with their detailed calculations, together with an explanation of their likely causes.

Accepted Answer

Flexed budget
	Budget	Flexed	Actual
Units (Fishermen)
Opening inventory finished goods	0	0	0
Unit production	10,000	9,600	9,600
Unit sales	[latex] \underline{10,000} [/latex]	[latex] \underline{9,000} [/latex]	[latex] \underline{9,000} [/latex]
Closing inventory finished goods	[latex] \underline{\qquad 0} [/latex]	[latex] \underline{600} [/latex]	[latex] \underline{600} [/latex]
Cubic yards (materials)
Opening inventory materials	0	0	0
Materials purchases	30,000	30,800	30,000
Materials usage	[latex] \underline{30,00} [/latex]	[latex] \underline{28,000} [/latex]	[latex] \underline{28,000} [/latex]
Closing inventory materials	[latex] \underline{\qquad 0} [/latex]	[latex] \underline{2,000} [/latex]	[latex] \underline{2,000} [/latex]

	Budget		Flexed		Actual		Actual to flexed budget variances
	£		£		£		Variance	£	Working
Sales revenue	(10,000 × 48)	480,000	(9,000 × 48)	432,000	(9,000 × 48)	432,000	sales price	0
Opening inventories:
Finished goods		0		0		0
Materials		0		0		0
Materials purchased	(10,000 × 3 × 3.6)	(108,000)	((9,600 × 3 + 2,000) × 3.6)	(110,880)	(30,000 × 3.84)	(115,200)	materials price	(7,200)	30,000 × (3.6 − 3.84)
							materials usage	2,880	(30,800 − 30,000) × 3.6
Direct labour	(10,000 × 2 × 6.6)	(132,000)	(9,600 × 2 × 6.6)	(126,720)	(22,000 × 6.48)	(142,560)	labour rate	2,640	22,000 × (6.6 − 6.48)
							labour efficiency	(18,480)	(19,200 − 22,000) × 6.6
Variable overhead	(10,000 × 2 × 2.4)	48,000	(9,600 × 2 × 2.4)	(46,080)	(22,000 × 2.0)	(44,000)	overhead spend	8,800	22,000 × (2.4 − 2.0)
							overhead efficiency	(6,720)	(19,200 − 22,000) × 2.4
Fixed overhead	(10,000 × 2 × 4.8)	(96,000)		(96,000)		(100,000)	overhead spend	(4,000)	96,000 − 100,000
Closing inventories:
Finished goods		0	(600 × 38.4)	23,040	(600 × 38.4)	23,040
Materials			(2,000 × 3.6)		(2,000 × 3.6)
		[latex] \underline{\qquad 0} [/latex]		[latex] \underline{7,200} [/latex]		[latex] \underline{7,200} [/latex]		______
Net profit		[latex] \underline{96,000} [/latex]		[latex] \underline{82,560} [/latex]		[latex] \underline{60,480} [/latex]		(22,080)
Net profit
£ per unit		9.60		9.17		6.72
									Flexed budget to budget variances
							sales volume	(9,600)	(10,000 − 9,000) × 9.6
							fixed overhead		(10,000 × 2) × 4.8 − (9,600 × 2) × 4.8
							volume	[latex] \underline{(3,840)} [/latex]
							Total variances	[latex] \underline{35,520} [/latex]	actual minus budget profit

Operating statement for period 5 in 2010 (4 weeks)
				£
Budget sales revenue	10,000 × £48			480,000
Standard cost of sales	10,000 × £38.4			[latex] \underline{384,000} [/latex]
Budgeted profit				96,000
Variances		Favourable	Unfavourable
		£	£
Sales volume			9,600
Materials
Price			7,200
Usage		2,880
Direct labour
Rate		2,640
Efficiency			18,480
Variable overhead
Expenditure		8,800
Efficiency			6,720
Fixed overhead
Expenditure			4,000
Volume		______	[latex] \underline{3,840} [/latex]
		[latex] \underline{14,320} [/latex]	[latex] \underline{49,840} [/latex]	[latex] \underline{(35,520)} [/latex]
				[latex] \underline{60,480} [/latex]

Inventories are valued at standard cost at each month end so that a true month activity is reported, not previous inadequacies.

Variances	Favourable	Unfavourable	Likely causes of variances
	£	£
Sales volume		9,600	An extra 1,000 units had been planned for period 5 at £9.60 per unit standard profit.
Materials
Price		7,200	Factors may be economic, currency fluctuations or poor standards.
Usage	2,880		Low defects, better quality, better inventory control, different production methods, improved labour training
Direct labour
Rate	2,640		Lower grade, union negotiation, less overtime.
Efficiency		18,480	Machine breakdowns, rework (but not apparent from materials usage).
Variable overhead
Expenditure	8,800		Poor standard, tighter cost control.
Efficiency		6,720	Machine breakdowns, rework (but not apparent from materials usage).
Fixed overhead
Expenditure		4,000	Poor standard, tighter cost control.
Volume		3,840	Under-recoveries of fixed overhead because of low volumes.
	[latex] \underline{14,320} [/latex]	[latex] \underline{49,840} [/latex]

Question 13.1: Nilbog Ltd makes garden gnomes. It uses standard costs and h...

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