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Higgs Enterprise's flexible budget cost formula for indirect materials, a variable cost, is $0.75 per unit of output. If the company's performance report for last month shows a $600 favorable spending variance for indirect materials and if 8,000 units of output were produced last month, then the actual costs incurred for indirect materials for the month must have been:


a.$6,000


b.$5,400


c.$6,600


d.$5,200

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Answer: b. $5,400

Explanation:

When there is a FAVOURABLE VARIANCE it means that the ACTUAL amount spent on a project is less than the amount that the company BUDGETED for it.

There is a favourable Variance in the scenario described above meaning that the budgeted costs for Indirect Materials was higher than the actual costs.

That means that the actual costs can simply be calculated by the following formula,

Actual Cost = Budgeted Amount - Positive Variance.

Budgeted Amount = 0.75 * 8,000 units

Budgeted Amount = $6,000

Actual Cost incurred is therefore,

= 6,000 - 600

= $5,400

Hence the correct answer is Option B

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