Benefits of Budgeting, Budgeted Income Statement, Variance Analysis, Cost Estimation and Activity Based Costing

MANAGEMENT ACCOUNTING
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Question 2
a) The various benefits the budgeting are as highlighted below.
 Evaluation of performance – The performance of the various departments can be
evaluated based on the comparison between the actual performance and the budgeted
performance. The budgetary estimates tend to act as a yardstick for comparison.
 Planning – During the budgeting exercise, typically the management makes future
estimates of performance and the potential targets which provide a futuristic growth
trajectory of the company.
 Communication & Control Tool – Budgeting acts as a communication tool with
regards to the priorities of the organisation considering the allocation of the funding.
Further, it can also be used as a control activity since through resource allocation
control of different projects, activities and department may be done.
b) The budgeted income statement for the year ending December 31, 2016 is indicated below.
Question 4
A) i) Direct material price variance = Actual quantity * Actual price –Standard quantity *
Standard Price = 23100*2.6 – 23400*2.5 = $ 1,560
The positive value represents unfavourable variance.

Direct material efficiency variance = (Actual quantity – Budgeted Quantity)* Standard price
= (23100-23400)*2.5 = - $ 750
The negative value represents favourable variance.
ii) Direct labour price variance = Actual hours * Actual rate – Actual hours* Standard Price =
40100*18 – 40100*17 = $ 40,100
The positive value represents unfavourable variance.
Direct labour efficiency variance = (Actual hours – Budgeted hours )* Standard Rate =
(40100- 46800)*17 = -$ 113,900
The negative value represents favourable variance.
(iii) Variable overhead spending variance = (Standard overhead rate – Actual overhead
rate)*Actual Units = (23-(960000/40100))*40100 = - $ 37,700
The negative value shows unfavourable variance.
Variable overhead efficiency variance = Actual hours * Standard overhead rate - Actual
overhead cost = 40100*23 – 960000 = - $ 37,700
The negative value shows unfavourable variance.
(iv) Fixed overhead appending variance = Actual fixed overheads – Budgeted fixed
overheads = 291000 – 300000 = -$ 9,000
The negative value represents favourable variance.
Fixed overhead volume variance = (Actual activity – normal activity) * Fixed overhead rate =
(7800-7700)*(300000/7700) = $ 3,896
The negative value represents unfavourable variance.
B) The total overhead variance amount would be debited and the same amount would be
credited from the COGS.
C) It is apparent that there are significant variances particularly with regards to direct labour.
Such huge variances on either sides are not considered positive and hence analysis must be