Institute Technologies is choosing new cost drivers for its accounting system.One driver is labor hours; the other is a combination of machine hours for unit variable costs and number of setups for a pool of batch-level costs.Data for the past year follow. Assume that both cost pools for Institute are combined into a single pool, and labor hours is the driver.The total ﬂexible budget for the actual level of labor hours and the total variance for the combined pool are:
A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question

Institute Technologies is choosing new cost drivers for its accounting system.One driver is labor hours; the other is a combination of machine hours for unit variable costs and number of setups for a pool of batch-level costs.Data for the past year follow.  Assume that both cost pools for Institute are combined into a single pool, and labor hours is the driver.The total ﬂexible budget for the actual level of labor hours and the total variance for the combined pool are: 
A)Choice A 
B)Choice B 
C)Choice C 
D)Choice D 
E)Choice E

Quizplus · Accepted Answer

To calculate the flexible budget, we need to multiply the budgeted rate for each cost pool by the actual activity level.

For labor hours, the budgeted rate is $20 per hour (total budgeted cost of $200,000 divided by total budgeted hours of 10,000). The actual labor hours are 9,000. So the flexible budget for labor hours is:

$20 x 9,000 = $180,000

For the combined pool of machine hours and setups, the budgeted rate is $10 per machine hour and $50 per setup. The actual machine hours are 6,000 and the actual number of setups is 120. So the flexible budget for the combined pool is:

($10 x 6,000) + ($50 x 120) = $60,000 + $6,000 = $66,000

The total flexible budget is the sum of the flexible budget for each cost pool:

$180,000 + $66,000 = $246,000

To calculate the total variance for the combined pool, we need to compare the actual cost for the combined pool to the budgeted cost for the combined pool.

The actual cost for the combined pool is $72,000 ($48,000 for machine hours and $24,000 for setups). The budgeted cost for the combined pool is:

($10 x 10,000) + ($50 x 200) = $100,000 + $10,000 = $110,000

The total variance for the combined pool is:

Budgeted cost - Actual cost = $110,000 - $72,000 = $38,000

Therefore, the best choice is B, with a flexible budget of $246,000 and a total variance of $38,000.

Institute Technologies Is Choosing New Cost Drivers for Its Accounting