3) a) Following are the main differences between static and flexible budget: 1.

Nature A static budget does not change with the actual volume of the output achieved. A flexible budget is designed to change appropriately with the level of activity attained. 2. Scope A static budget cannot ascertain costs correctly in case of any change in circumstances. Flexible budget can easily ascertain costs in different levels of activities. 3. Determination of Cost Static budget is prepared under the assumption that all conditions will remain unaltered. Flexible budget is prepared at different levels of activities considering the possible changes in the operational aspect of a business. 4. Assumptions Static budget has a limited application and is ineffective as a tool for cost control. Flexible budget has a wide application as an effective tool for cost control. 5. Pre-requistes Static budget is prepared without classifying the costs according to their variable nature. Flexible budget is prepared by classifying the costs according to their variable nature. Flexible budget: Overhead cost. Variable O/H cost Utilities Lubricants Machine setup Indirect labor Total OH cost Cost P.unit 0.6 0.9 0.2 0.5 10,00 0 6,000 9,000 2,000 5,000 22,00 0 15,000 9,000 13,50 0 3,000 7,500 33,00 0 20,000 12,000 18,000 4,000 10,000 44,000 8000 12000 32000 52000 96,00 0

Fixed overhead cost: lubricant 8000 8000 indirect labor 12000 12000 depreciation 32000 32000 52000 52000 Fixed OH cost 74,000 85,000 Overhead performance budget: Machine hours Variable overhead: Liabilities Lubricant Indirect labor cost punit 0.6 0.9 0.5 actual 18000 12000 16500 10500

budget 18000 10800 16200 9000

variance 1200 UF 300 UF 1500 UF

Machine setup Fixed Overhead Lubricant Indirect labor Depreciation total overhead 4)

0.2 4800 43800 8000 12000 32000 52000 95800 3600 39600 8000 12000 32000 52000 91600 1200 UF 4200 UF 0 0 0 0 4200 UF

a) Ideal versus practical standard. Standards tend to fall into one of two categories-either ideal or practical. Ideal standards allow for no machine breakdowns or work interruptions, and require that workers operate at peak efficiency 100 percent of the time. Since ideal standards are rarely met, most managers believe they tend to discourage even the most diligent workers. Practical standards are "tight, but attainable." They allow for normal machine downtime and employee rest periods and can be attained through reasonable, but highly efficient, efforts by the average worker. Labor quantity standards and labor efficiency variances make two important assumptions. First, they assume that the production process is labor-paced; if labor works faster, output will go up. However, output in many companies is no longer determined by how fast labor works; rather, it is determined by the processing speed of machines. Second, these computations assume that labor is a variable cost. However, in many companies direct labor may be more of a fixed cost than a variable cost. And if labor is a fixed cost, then an undue emphasis on labor efficiency variances creates pressure to build excess work-in-process and finished goods inventories as discussed above.

b)

c) Direct indirect variance Material price variance = (AP-SP) AQ= (10800 18000) = (0.60-0.50) 18000 =1800UF Quantity = (AQ-SQ) SP = (14000-12000) 0.5=1000UF Direct labor variance (AR-SR) AHW= (9.75-100)4000 =1000F Efficiency= (AH-SH) SR = 4000-3600) 10 =4000UF Variable manufacturing overhead variance: Variable O/H variance= (AR-SR) AH 20800/4000 hrs= 5.2 H= (5.2-5)4000 = 800 UF Efficiency: = (AH-SH) SR = (4000-3600)*5 =2000 UF.