a) Discuss the initial budget process, the variances, and potential reasons for the variances. b) Determine changes you think the company should make based on the variance analysis. What will the changes accomplish? c) What are the ethical considerations

Budgets

	(a)	Sales Budget
			July	August	September
		Budgeted Sales Units (a)	19000	21000	20000
		Selling Price (b)	$ 18	$ 18	$ 18
		Budgeted Sales (a x b)	$ 332,500	$ 367,500	$ 350,000
	(b)
	( c)	Production Budget
			July	August	September
		Budgeted Sale units	19000	21000	20000
		Add: Closing Inventory	14700	14000	16800
		Budgeted units available	33700	35000	36800
		Less: Opening Inventory	14700	14700	14000
		Budgeted Production	19000	20300	22800
	(d)
	(e)	Manufacturing Budget
			July	August	September
		Direct Material (see working)	$ 76,000	$ 81,200	$ 91,200
		Direct Labor (see working)	$ 152,000	$ 162,400	$ 182,400
		Manufacturing Overhead	$ 32,825	$ 33,703	$ 35,390
		(see working)
		Budgeted Manufacturing Cost	$ 260,825	$ 277,303	$ 308,990
	(f)
	(g)	Selling Expense Budget
			July	August	September
		Sales Manager's Salary	$ 3,750	$ 3,750	$ 3,750
		Sales Representatives' Commissions	$ 33,250	$ 36,750	$ 35,000
		Selling Expense Budget	$ 37,000	$ 40,500	$ 38,750
	(h)
	(i)	General and Administrative Expense Budget
			July	August	September
		Administrative Salaries	$ 12,000	$ 12,000	$ 12,000
		Interest on Notes Payable	$ 22,500	$ 22,500	$ 22,500
		General and Administrative Exp.	$ 34,500	$ 34,500	$ 34,500
	(j)
	WORKINGS
	1	Direct Material Cost Budget
			July	August	September
		Budgeted Production Units	19000	20300	22800
		Materials required per unit	0.5	0.5	0.5
		Material Units needed for Production	9500	10150	11400
		Material Cost per unit	$ 8	$ 8	$ 8
		Cost of Direct Materials	$ 76,000	$ 81,200	$ 91,200
	2	Direct Labor Budget
			July	August	September
		Budgeted Production Units	19000	20300	22800
		Labor hours required per unit	0.5	0.5	0.5
		Total labor hours need for production	9500	10150	11400
		Cost per labor hour	$ 16	$ 16	$ 16
		Budgeted Direct Labor Cost	$ 152,000	$ 162,400	$ 182,400
	3	Manufacturing Overhead Budget
			July	August	September
		Direct labor hour need for production	9500	10150	11400
		Variable Overhead Rate	$ 1.35	$ 1.35	$ 1.35
		Budgeted Variable Overhead	$ 12,825	$ 13,703	$ 15,390
		Depreciation	$ 20,000	$ 20,000	$ 20,000
		Budgeted Manufacturing Overhead	$ 32,825	$ 33,703	$ 35,390
	4	Direct Material Purchase Budget
			July	August	September
		Budgeted Production Units	19000	20300	22800
		Materials required per unit	0.5	0.5	0.5
		Material Units needed for Production	9500	10150	11400
		Add: Budgeted ending inventory	2030	2280	1980
		Total Material units required	11530	12430	13380
		Less: Budgeted opening inventory	4375	2030	2280
		Material units to be purchased	7155	10400	11100
		Material Cost per unit	$ 8	$ 8	$ 8
		Cost of Direct Materials	$ 57,240	$ 83,200	$ 88,800

To compute budgeted sales we have multiplied unit sale price with the budgeted units of monthly sales

To prepare production, first we have take monthly budgeted sale units and then we added desired ending inventory to that and form the total we hade subtracted opening inventory of finished goods

Manufacturing budget consists of three budgets (direct material, direct labor and manufacturing overhead). These three budgets are given as working notes. To find out the budgeted cost of material we multiplied budgeted required material with the unit cost of material. For direct labor cost, we multiplied required labor hours with the per hour labor cost. Manufacturing overhead budget is the sum of variable overhead and depreciation.

Selling expense budget is consists of sale manager's salary and sales representatives' commissions. For commission, we have multiplied the rate of commission (10%) with the budgeted sales and the sales manager's salary is fixed $3,750 monthly.

General and Administrative expense budget consists of administrative salary and interest on long term notes payable. Administrative salary is fixed to $ 12,000 per month and Interest on loan is considered at 0.9% p.a. on long term notes payable.

Budget Variance Alalysis

		Budget Variance Perfromance Report
			Budget	Actual	Variance
		Direct Material	$ 248,400	$ 240,250	$ 8,150	(F)
		Direct Labor	$ 496,800	$ 495,000	$ 1,800	(F)
		Manufacturing Overhead
		Variable	$ 41,917.50	$ 44,550.00	$ (2,632.50)	(U)
		Fixed	$ 60,000	$ 60,000	$ - 0
		Total	$ 847,118	$ 839,800	$ 7,318	(F)
		Material Price Variance
		(SP x AQ) - (AQ x AP)
		($8 x 31000) - $240250
		$248000 - $240250	$ 7,750.00	(F)
		Material Usage Variance
		(SQ x SP) - (AQ x SP)
		$248400 - $248000	$ 400.00	(F)
		Labor Rate Variance
		(SR x ALH) - (AR x ALH)
		($16 x 33000) - $495,000	33000	(F)
		Labor Efficiency Variance
		(SLH x SR) - (ALH x SR)
		$496,800 - $528,000	31200	(U)
		Variable Overhead Spending Variance
		(SLH x Std. Variable Overhead Rate
		(ALH x Std. Variable Overhead Rate)
		($41,917.50 - $44550.00)	$ 2,632.50	(U)
		Fixed Overhead Expenditure Variance
		(Actual Fixed Overhead - Budgeted
		Fixed Overhead)
		($60,000 - $60,000)	Nil

1. For direct material variance, we need to see the quantity of material used and the material price. If quantity of material used is differ from budgeted one / or material price is differ from the budgeted one then this will lead to material cost variance. 2. For direct labor variance, we need to see the labor hours used and the labor rate per hour. If labor hours used is differ from budgeted one / or labor rate is differ from the budgeted one then this will lead to labor cost variance. 3. For variable overhead variance, we will see the actual labor hours used for the production and if differ from the budgeted labor hour, then this will result variable overhead varaince.

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