1&2 Static Budget Flexible Budget

Units 400,000 450,000

Revenue 3,200,000 3,600,000
Direct Material 580,000 652,500
Direct Labor 336,000 378,000
Variable Overhead 648,000 729,000
Total Variable Costs 1,564,000 1,759,500
Contribution Margin 1,636,000 1,840,500
3

The contribution margin with the flexible budget reflects the increase in uits
produced, increase in revenue as well as increase in total variable costs. The
static budget was under projected by quite a bit in comparison to the actual
numbers. This is a good example of why a flexible budget is necessary.
4
A
Direct Material Price Variance Actual Usage
Cookie Mix - 93,000
Milk Chocolate 26,600 532,000
Almonds - 240,000

B
Direct Material Quantity Variance Actual Usage
Cookie Mix 3,000 4,650,000
Milk Chocolate 61,500 2,660,000
Almonds 15,000 480,000
Total 79,500

C
Actual Cost Standard Cost
Mixing 14.4 14.4
Baking 18 18

D
Direct Labor Efficency Variance
Mixing 0 No Variance (See formula)
Baking (60,000) Favorable

E
Variable Overhead Spending Variance
See formula
496,875 Unfavorable
F
Variable Overhead Efficency Variance
See formula
(54,000) Favorable

G
Sales Price Variance
See formula
(45,000) Unfavorable

5
A

Whenever applying overhead, one must make sure that the correct cost driver
is being used. Direct labor hours may not be the correct cost driver for the
situation at hand. If the wrong cost driver is used, the costs being displayed
could not be completely accurate.

When using ABC, more than one cost driver is used from the beginning and
each may be calculated with respect to another. This eliminates the problem of
using an incorrect cost driver and having semi inaccurate results
 Actual Variance
450,000 -
3,555,000 45,000 U
865,000 (212,500) U
348,000 30,000 F
750,000 (21,000) U
1,963,000 (203,500) U
1,592,000 248,500 U

Favorable/Not
N/A (equal - see formula)
Unfavorable
N/A (equal - see formula)

Favorable/Not
Unfavorable
Unfavorable
Unfavorable
Unfavorable

Direct Labor Variance Rate

0 No Variance (See formula)
0 No Variance (See formula)

e (See formula)

75,000 U
One problem may be that direct labor is not an appropriate cost driver for Aunt Mollys Old
Fashioned Cookies because it may not be the activity that drives variable overhead. A good
indication of this situation is shown in the variance analysis. The direct-labor efficiency
variance is favorable, while the variable-overhead spending variable is unfavorable.
Another problem is that baking requires considerably more power than mixing does; this
difference could distort product costs

Activity-based costing (ABC) may solve the problems described in requirement 2(a) and therefore is a
Mollys should consider. Since direct labor does not seem to have a direct cause-and-effect relationship w
company should try to identify the activity or activities that drive variable overhead. If the same proport
used in all of Aunt Mollys products, then ABC may not be beneficial. However, if the products require
activities, then ABC could be beneficial
 ent 2(a) and therefore is an alternative that Aunt
e-and-effect relationship with variable overhead, the
rhead. If the same proportion of these activities is
ver, if the products require a different mix of these
eficial