ACC 311 Module 6 Flexible Budget and Variance Assignment Example

Under Budget and Over Cost: A Flexible Budget and Variance Analysis for the First Quarter on a Steel Moldboard Line

[Student Name]

Southern New Hampshire University

ACC 311: Cost Accounting

Module Six Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Under Budget and Over Cost: A Flexible Budget and Variance Analysis for the First Quarter on a Steel Moldboard Line

Introduction

When the first quarter closed at Kettle River Truck Equipment, the production manager was pleased: labor cost for the moldboard line came in more than $14,000 under budget. The controller was less pleased, because the line had also built 300 fewer moldboards than planned. A warm December and January cut dealer orders, and output fell from a planned 2,400 units to 2,100. Comparing actual costs with a budget built for 2,400 units mixes two questions, how much the line produced and how well it controlled costs for what it produced. This assignment separates them with a flexible budget and standard cost variances, then explains causes and responsibility.

Standards and Actual Results

Table 2. Actual Results for the Quarter

Fixed overhead is budgeted at $180,000 for the quarter, and the $25 rate divides that amount by the 7,200 standard labor hours planned for 2,400 units.

Why the Static Budget Misleads

The static budget allowed $230,400 for labor at 2,400 units. Actual labor of $216,132 is $14,268 below that, which looks favorable. But the line made only 2,100 units, which should have needed just 6,300 standard hours, or $201,600. Against that benchmark, labor was $14,532 over. The static budget rewarded the line for producing less. A flexible budget restates every variable cost at the actual level of output, so that the comparison isolates price and efficiency (Datar & Rajan, 2021).

Flexible Budget and Variances

Table 4. Variance Detail

The component variances reconcile to the totals: $54,000 plus $19,800 equals the $73,800 materials variance; $7,812 plus $6,720 equals the $14,532 labor variance; and $1,960 plus $2,940 equals the $4,900 variable overhead variance. Total fixed overhead was underapplied by $25,900, the sum of the spending and production-volume variances, since only $157,500 was applied to the 6,300 standard hours.

Causes and Responsibility

The largest variance, the $54,000 materials price variance, came from a steel price spike in November. The purchasing manager bought plate on the spot market at $1.16 rather than locking in a quarterly contract. This variance belongs to purchasing, though the decision was reasonable given that a contract would have committed the shop to volume it did not need in a warm winter.

The $19,800 materials quantity variance is linked to the price story. To find steel quickly, purchasing bought a lot from an unfamiliar mill, and the plate arrived with thickness variation that caused extra scrap on the press brake. A variance that looks like a production problem was partly caused by a purchasing choice, which is why responsibility should be discussed rather than assigned automatically.

Labor shows the same chain. The $6,720 efficiency variance reflects time spent reworking blades formed from the uneven plate and two days when a press was down. The $7,812 rate variance has a different cause: with orders down, the shop kept its two most senior operators, whose wage rate is above standard, and sent newer operators home. That was a deliberate choice to keep skilled workers, and it raised the average rate.

Variable overhead moved with labor hours: the $2,940 efficiency variance comes from the same extra hours, and the $1,960 spending variance mainly from higher natural gas prices for the paint booth's heaters. The $3,400 fixed overhead spending variance was an unbudgeted press repair.

The $22,500 production-volume variance is different in kind. It does not mean anyone spent too much; it means fixed costs were spread over 300 fewer units than planned because demand fell. It is a signal about unused capacity and belongs to sales and senior management, not the line supervisor.

What Management Should Do

Libby and Lindsay (2010) found that most North American firms still rely on budgets for control but increasingly adjust how they use them, and Hansen et al. (2003) note that rigid budget targets can push managers into choices that look good against the budget but hurt the business. Both points apply here. Penalizing the supervisor for the efficiency variances alone would ignore that purchasing's choice of mill drove much of them. Three actions follow: purchasing should qualify a second mill in advance so emergency buys do not compromise plate quality; the shop should consider a partial steel contract covering expected minimum volume; and the controller should report variances quarterly in a flexible budget format so that a drop in output never again looks like cost control.

Conclusion

The moldboard line was not under budget in the first quarter. Against a flexible budget for 2,100 units, every cost was over standard, led by a $54,000 materials price variance and a $22,500 production-volume variance. Most variances trace back to two events, a steel price spike and a warm winter, and several are linked to one another. Read as a connected set, they point to fixes in purchasing and planning more than on the shop floor.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Hansen, S. C., Otley, D. T., & Van der Stede, W. A. (2003). Practice developments in budgeting: An overview and research perspective. Journal of Management Accounting Research, 15(1), 95-116. https://doi.org/10.2308/jmar.2003.15.1.95

Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21(1), 56-75. https://doi.org/10.1016/j.mar.2009.10.003