Flexed Budget Variances in a Volatile Month
Harbour Mouldings produces a single component. The static budget for October was: output 5,000 units, direct material 2 kg per unit at £8/kg, direct labour 0.5 hours per unit at £14/hour, variable overhead £3 per labour hour, fixed overhead £40,000. Actual results: output 5,600 units; material purchased and used 11,760 kg costing £91,728; labour 2,912 hours costing £39,312; variable overhead £9,600; fixed overhead £41,300. The production manager is praised for beating the static material budget, while the purchasing manager claims the material price rise was unavoidable because a supplier failed and emergency buying was needed at short notice.
1. Calculate the flexed budget and the material, labour and variable overhead variances, stating whether each is favourable or adverse.
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Flexed budget at 5,600 units:
- Material: 5,600 × 2 kg = 11,200 kg × £8 = £89,600
- Labour: 5,600 × 0.5 h = 2,800 h × £14 = £39,200
- Variable OH: 2,800 h × £3 = £8,400
- Fixed OH: £40,000
Material variances:
- Price: (standard price − actual price) × actual qty = (£8 − £91,728/11,760) × 11,760. Actual price = £7.80/kg. (£8.00 − £7.80) × 11,760 = £2,352 favourable.
- Usage: (standard qty − actual qty) × standard price = (11,200 − 11,760) × £8 = £4,480 adverse.
- Total material variance: £89,600 − £91,728 = £2,128 adverse.
Labour variances:
- Rate: (£14 − £39,312/2,912) × 2,912. Actual rate = £13.50/h. (£14.00 − £13.50) × 2,912 = £1,456 favourable.
- Efficiency: (2,800 − 2,912) × £14 = £1,568 adverse.
- Total: £39,200 − £39,312 = £112 adverse.
Variable overhead:
- Expenditure: (2,912 × £3) − £9,600 = £8,736 − £9,600 = £864 adverse.
- Efficiency: (2,800 − 2,912) × £3 = £336 adverse.
- Total: £8,400 − £9,600 = £1,200 adverse.
2. Assess the managers' claims and recommend what the variance report should say.
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Production manager's 'beat the static budget' claim is misleading. The static material budget was £80,000 (5,000 × 2 × £8), and actual spend was £91,728 - apparently £11,728 over. But the correct comparison is the flexed budget: £89,600 vs £91,728 gives only a £2,128 adverse variance. Comparing actual to static ignores the 600-unit volume increase, so praise or blame based on the static figure is invalid. On the flexed basis the manager has an adverse usage variance of £4,480 (5% over standard), which needs explanation.
Purchasing manager's claim is only partly supported. The price variance is favourable (£2,352), not adverse - the emergency supplier was actually cheaper per kg than standard. So the 'unavoidable price rise' argument does not hold. However, the usage variance may be linked: emergency material could be of inconsistent quality, causing waste. That is a plausible operational explanation but must be evidenced, not assumed.
Recommendation: report both price and usage variances on the flexed basis; separate the controllable usage variance from the volume effect; investigate whether emergency sourcing drove the 5% excess usage; and note that the labour rate is favourable but efficiency is adverse, consistent with less experienced cover or rushed working.