Fixit Ltd is a manufacturing company which produces a fixed budget for planning purposes. Set out below is the fixed monthly budget of production costs, together with the actual results observed for the month of July Year 7.
|
Budget |
Actual |
|
|
Units produced |
5,000 |
5,500 |
|
£ |
£ |
|
|
Costs: |
||
|
Direct materials |
20,000 |
22,764 |
|
Direct labour |
60,000 |
75,900 |
|
Variable production overhead |
14,000 |
14,950 |
|
Fixed production overhead |
10,000 |
9,000 |
|
Depreciation |
4,000 |
4,000 |
In preparing the fixed budget, the following standards were adopted:
|
Direct material |
10 kg of materials per unit produced. |
|
Direct labour |
2 hours per unit produced. |
|
Variable production overhead |
A cost rate per direct labour hour was calculated. |
|
Fixed production overhead |
A cost rate per unit was calculated. |
|
Depreciation |
Straight line method is used for all assets. |
The following additional information is available concerning the actual output:
(a) the actual usage of materials in July was 54,200 kg; and
(b) the nationally agreed wage rate increased to £6.60 per hour at the start of July.
Required
(a) Prepare a flexible budget in respect of Fixit Ltd for the month of July Year 7.
(b) Analyse and comment on cost variances.