Question: Al Buran Establishment in Dubai UAE is a firm that manufactures and sells golf clubs. The golf clubs require precision assembly of the wood or iron, the shaft and the handle many other hand operations. The company sells exclusively to distributors who in turn sell to retail chains and sporting goods companies. The company incurs costs only in the manufacturing function. The following assumptions are made:
- All units started in one month are completed in the same month.
- There is no inventory of raw materials at the beginning or end of the period.
- There is no work in process inventory at the beginning or end of the period.
The company has three variable cost categories. The budgeted variable cost per unit for each category is as follows:
Cost category Budgeted Variable cost per golf club
Direct materials costs 60
Direct manufacturing labor costs 40
Variable manufacturing labor costs 20
Total budgeted variable costs 120
Budgeted and actual data for 2015 are as follows:
- Budgeted fixed costs for production from 0 to 16,000 units = AED 480,000
- Budgeted Selling price 180 per golf club
- Budgeted production and sales = 16,000 golf clubs
- Actual production and sales = 12,000 golf clubs
Actual Revenues amount to AED 2,400,000 (AED 200 per unit x 12,000 units)
Actual Variable Cost
Cost category Actual Variable Cost
Direct materials costs AED 80 x 12,000 = 960,000
Direct manufacturing labor costs AED 30 x 12,000 = 360,000
Variable manufacturing labor costs AED 25 x 12,000 = 300,000
Total variable costs AED 1,620,000
Actual Fixed Costs AED 600,000
Instructions: 1. Complete the static budget and the actual results in the table above and determine the static - budget variances.
2. Flexible budget variances and Sales Volume Variances
Using the information in 1. Above, consider that the Al Buran Establishment has decided to prepare a flexible budget at 12,000 units of production.
Instructions: Complete the table below and calculate the a) the flexible budget variance and b) the sales volume variance