Chapter 16, Problem 51P

Solve for Master Budget Given Actual Results

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. Manufacturing fixed costs are estimated at $2 per unit at the normal volume of 108,000 units. Management notes, “We budget an operating profit of $1 per unit at the normal volume.”

Required

1. a.      Construct the master budget for the period.
2. b.      Prepare a profit variance analysis like the one in Exhibit 16.5.

To determine

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 $(108,000\text{units }\times \text{ \$5)}$	$540,000
Less: Variable costs
Manufacturing  $(\$540,000\text{ - \$54,000 - \$380,000)}$	$106,000
Marketing &administrative costs $(10\%\times \$540,000)$	$54,000
Contribution margin	$380,000
Less: Fixed Costs
Manufacturing $(\$2\times \text{ 108,000 units)}$	$216,000
Less: Marketing &administrative costs $(\$380,000\text{ - \$216,000 - \$108,000)}$	$56,000
Operating Profits$(\$1\times \text{ 108,000 units)}$	$108,000

Table: (1)

To determine

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 $\left(b\right)=\left(d-a\right)$	Marketing and administrative variance $\left(c\right)=\left(d-a\right)$	Sales price variance	Flexible budget (d)	Sales Activity Variance $\left(e\right)=\left(d-f\right)$	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:

$\begin{array}{c}\text{Flexible budget sales revenue = Flexible budget units }\times \text{ budgeted unit price}\\ \text{= 120,000 }\times \text{ \$5}\\ \text{= \$600,000}\end{array}$

Working Note 2:

$\begin{array}{c}\begin{array}{l}\text{Contribution margin }\\ \text{flexible budget}\end{array}\}\text{= }\left(\frac{\text{Master contribution margin}}{\text{Master units}}\times \text{ Flexible budget units}\right)\\ \text{= }\frac{\text{\$380,000}}{\text{108,000}}\times \text{ 120,000}\\ \text{= \$422,222}\end{array}$

Working Note 3:

$\begin{array}{c}\text{Flexible budget marketing and administrative cost}\text{= 10\% }\times \text{ \$600,000(1)}\\ =\text{ \$60,000}\end{array}$

Working Note 4:

$\begin{array}{c}\begin{array}{l}\text{Flexible budget }\\ \text{Manufacturing cost}\end{array}\}\text{= }\left(\frac{\text{Master manufacturing cost}}{\text{Master units}}\times \text{ Flexible budget units}\right)\\ \text{=}\frac{\text{\$106,000}}{\text{108,000}}\times \text{120,000}\\ \text{= \$117,778}\end{array}$

Working Note 5:

$\begin{array}{c}\text{Master budget fixed manufacturing cost = \$2 }\times \text{ 108,000 master budget units}\\ =\text{ \$216,000}\end{array}$

Working Note 6:

$\begin{array}{c}\text{Master budget operating profit = \$1 }\times \text{ 108,000 master budget units}\\ \text{= \$108,000}\end{array}$

Working Note 7:

$\begin{array}{c}\begin{array}{l}\text{Master budget fixed marketing }\\ \text{and administrative cost}\end{array}\}\text{= \$380,000 - \$216,000(5) - \$108,000(6)}\\ \text{= \$56,000}\end{array}$