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A new accounting intern at Gibson Corporation lost the only copy of this period’s master budget. The CFO wants to evaluate performance for this period but needs the master budget to do so. Actual results for the period follow:
The company planned to produce and sell 108,000 units for $5 each. At that volume, the contribution margin would have been $380,000. Variable marketing and administrative costs are budgeted at 10 percent of sales revenue.
Required
- a. Construct the master budget for the period.
- b. Prepare a profit
variance analysis like the one in Exhibit 16.5.
a.
Prepare the master budget for the period based on given information.
Explanation of Solution
Master Budget:
The master budget is prepared for synchronizing the organization goals with that of the individual units. Such a budget is particularly used to assess the actual performance. Operating and financial budgets are included in the master budgets.
Prepare the master budget for the period:
Master budget | |
Units Produced | 108,000 |
Sales revenue | $540,000 |
Less: Variable costs | |
Manufacturing | $106,000 |
Marketing &administrative costs | $54,000 |
Contribution margin | $380,000 |
Less: Fixed Costs | |
Manufacturing | $216,000 |
Less: Marketing &administrative costs | $56,000 |
Operating Profits | $108,000 |
Table: (1)
b.
Prepare a profit variance analysis.
Explanation of Solution
Profit variance analysis:
The analysis that studies the difference between the actual operating profit and the standard operating profit is called the profit variance analysis.
Prepare a profit variance analysis:
Actual Revenue & Costs (a) |
Manufacturing variance |
Marketing and administrative variance |
Sales price variance |
Flexible budget (d) |
Sales Activity Variance |
Master budget (f) | |
Units Produced | 120,000 | 120,000 | 12,000 | 108,000 | |||
Sales revenue | $672,000 | $72,000F | $600,000(1) | $60,000F | $540,000 | ||
Less: Variable costs | |||||||
Manufacturing | $147,200 | $29,422U | $117,778(4) | $11,778U | $106,000 | ||
Marketing &administrative costs | $61,400 | $1,400U | $60,000(3) | $6,000U | $54,000 | ||
Contribution margin | $463,400 | $29,422U | $1,400U | $72,000F | $422,222(2) | $42,222 | $380,000 |
Less: Fixed Costs | |||||||
Manufacturing | $205,000 | $11,000F | $216,000 | $216,000(5) | |||
Marketing &administrative costs | $113,200 | $57,200U | $56,000 | $56,000(7) | |||
Operating Profits | $145,200 | $18,422U | $58,600U | $72,000F | $150,222 | $42,222F | $108,000(6) |
Table: (2)
Working Note 1:
Working Note 2:
Working Note 3:
Working Note 4:
Working Note 5:
Working Note 6:
Working Note 7:
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Chapter 16 Solutions
Fundamentals of Cost Accounting
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