You have been provided the following information about Wookie Headphones .

Is the flexible budget variance for Variable overhead favourable, unfavourable or neither?

Static budget Flexible budget Actual
Budgeted sales (units) 7500 5000 5000
Budgeted price $27.00 $27.00
Total sales $202,500.00 $135,000.00 $140,000.00

Less Cost of Goods sold
Direct material $48,750.00 $32,500.00 $33,500.00
Direct labour $69,375.00 $46,250.00 $47,500.00
Variable overhead $18,750.00 $12,500.00 $12,000.00
Fixed overhead $25,000.00 $25,000.00 $27,000.00

GROSS PROFIT $40,625.00 $18,750.00 $20,000.00

Variable selling and admin $20,625.00 $13,750.00 $17,500.00
Fixed selling and admin $7,680.00 $7,680.00 $8,200.00

NET PROFIT $12,320.00 ($2,680.00) ($5,700.00)

Question

You have been provided the following information about Wookie Headphones .

Is the flexible budget variance for Variable overhead favourable, unfavourable or neither?

Static budget	Flexible budget	Actual
Budgeted sales (units)	7500	5000	5000
Budgeted price	$27.00	$27.00	
Total sales	$202,500.00	$135,000.00	$140,000.00
		 	
Less Cost of Goods sold		 	
Direct material	$48,750.00	$32,500.00	$33,500.00
Direct labour	$69,375.00	$46,250.00	$47,500.00
Variable overhead	$18,750.00	$12,500.00	$12,000.00
Fixed overhead	$25,000.00	$25,000.00	$27,000.00
		 	
GROSS PROFIT	$40,625.00	$18,750.00	$20,000.00
		 	
Variable selling and admin	$20,625.00	$13,750.00	$17,500.00
Fixed selling and admin	$7,680.00	$7,680.00	$8,200.00
		 	
NET PROFIT	$12,320.00	($2,680.00)	($5,700.00)

BlackTom AI · Accepted Answer

Variable overhead is variable with activity, so the correct comparison is Actual variable overhead versus the Flexible budget amount (which adjusts the static budget to the actual activity level). If Actual < Flexible, the variance is favourable; if Actual > Flexible, it is unfavourable. 1. Relevant knowledge points and concepts - Flexible budget variance for a cost = Actual cost incurred − Flexible budget cost at actual activity. - For costs, a negative variance (Actual < Flexible) is “favourable” because less was spent than expected; a positive variance is “unfavourable.” - Flexible budget amounts reflect the budgeted cost per unit multiplied by actual units. 2. Step-by-step reasoning - Identify the flexible budget variable overhead and the actual variable overhead from the table. - Flexible budget variable overhead = $12,500 - Actual variable overhead = $12,000 - Compute the variance: Actual − Flexible. 3. Calculations (all intermediate steps) - Variance = Actual VOH − Flexible VOH - Variance = $12,000 − $12,500 = −$500 - Alternatively, per-unit check: Flexible VOH per unit = $12,500 / 5,000 units = $2.50 per unit. Actual VOH per unit = $12,000 / 5,000 units = $2.40 per unit. Per-unit savings = $2.50 − $2.40 = $0.10 × 5,000 units = $500 favourable. 4. Why the correct answer is correct - The variance is −$500 (Actual less than Flexible), so costs were $500 lower than expected at the actual activity level. For costs, spending less than the flexible budget is favourable. 5. Why other options are incorrect - “Neither” would apply only if Actual = Flexible (variance = $0); here the variance is $500, so not correct. - “Unfavourable” would apply if Actual > Flexible (positive variance); here Actual < Flexible, so “Unfavourable” is incorrect. 6. Conclusion - The flexible budget variance for Variable overhead is Favourable (variance = $500 favourable), which matches the provided answer.

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