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ACCA Applied Skills · Performance Management · Budgetary systems and types of budget

Zenco budgeted production of 10,000 units at a total cost of $190,000, of which $50,000 is fixed. Actual production was 12,000 units at an actual total cost of $214,000. The budget variance is calculated against a flexed budget. What is the variance?

The variance is $4,000 favourable. The flexed budget for 12,000 units is $50,000 fixed plus $14 per unit variable, giving $218,000. Actual cost of $214,000 is below this, so the cost variance is favourable, not adverse as a comparison with the fixed budget would suggest.

  1. A$4,000 adverseCorrect
  2. B$4,000 favourable
  3. C$24,000 adverse
  4. D$10,000 adverse

Explanation

Variable cost per unit = (190,000 - 50,000)/10,000 = $14. Flexed budget at 12,000 units = 50,000 + 12,000 x 14 = $218,000. Actual cost is $214,000, so the cost is $4,000 lower, which is favourable. Option A is therefore the wrong sign; the correct answer is $4,000 favourable. Comparing against the original budget ($190,000) would give $24,000 adverse, which ignores the volume change.

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