Videos
Concept introduction:
Flexible Budget:
A flexible budget, also known as variation budget adjusts to changes in volume or activity. Flexible budgets are prepared for comparing actual to budgeted performances at many levels of activity during the previous year. In order to accurately predict the changes in costs, management identifies them into fixed or variable costs.
Requirement 1:
Flexible budget performance report for 2015 of the company.
Answer to Problem 2PSA
Flexible budget performance report for the year ended December 31, 2015 (Amount in $):
| Particulars | Flexible budget | Actual Results | Variances | Favorable/ Unfavorable |
| Sales (18, 000 units) | 36, 00, 000 | 36, 48, 000 | 48, 000 | F |
| Variable costs: | ||||
| Direct materials | 11, 70, 000 | 11, 85, 000 | 15, 000 | U |
| Direct labor | 2, 70, 000 | 2, 78, 000 | 8, 000 | U |
| Machinery repairs | 72, 000 | 63, 000 | 9, 000 | F |
| Utilities | 54, 000 | 53, 000 | 1, 000 | F |
| Packaging | 90, 000 | 87, 500 | 2, 500 | F |
| Shipping | 1, 26, 000 | 1, 18, 500 | 7, 500 | F |
| Total variable costs | 17, 82, 000 | 17, 85, 000 | 3, 000 | U |
| Contribution margin | 18, 18, 000 | 18, 63, 000 | 45, 000 | F |
| Fixed costs: | ||||
| 3, 00, 000 | 3, 00, 000 | 0 | ||
| Utilities | 1, 50, 000 | 1, 47, 500 | 2, 500 | F |
| Plant management salaries | 2, 00, 000 | 2, 10, 000 | 10, 000 | U |
| Sales salary | 2, 50, 000 | 2, 68, 000 | 18, 000 | U |
| Advertising expense | 1, 25, 000 | 1, 32, 000 | 7, 000 | U |
| Salaries | 2, 41, 000 | 2, 41, 000 | 0 | |
| Entertainment expense | 90, 000 | 93, 500 | 3, 500 | U |
| Total fixed costs | 13, 56, 000 | 13, 92, 000 | 36, 000 | U |
| Income from operations | 4, 62, 000 | 4, 71, 000 | 9, 000 | F |
Explanation of Solution
For preparation of flexible budget of the company, following formulas would be used:
As per information in problem 8-1A, it is given that sales are $30, 00, 000 and sales volume is 15, 000 units. Flexible budget has to be prepared at sales volume of 18, 000 units. Now, required calculations have been made in the following manner:
| Particulars | Amount per unit | Amount |
| Sales (18, 000 units) | $30, 00, 000/ 15, 000 units = $200 | $200*18, 000 units = $36, 00, 000 |
| Variable costs: | ||
| Direct materials | $9, 75, 000/ 15, 000 units = $65 | $65*18, 000 units = $11, 70, 000 |
| Direct labor | $2, 25, 000/ 15, 000 units = $15 | $15*18, 000 units = $2, 70, 000 |
| Machinery repairs | $60, 000/ 15, 000 units = $4 | $4*18, 000 units = $72, 000 |
| Utilities | $45, 000/ 15, 000 units = $3 | $3 *18, 000 units=$54, 000 |
| Packaging | $75, 000/ 15, 000 units = $5 | $5*18, 000 units = $90, 000 |
| Shipping | $1, 05, 000/ 15, 000 units = $7 | $7*18, 000 units = $1, 26, 000 |
| Total variable costs | $99 | 17, 82, 000 |
Further, contribution margin can be calculated using the below- mentioned formulas:
Thus, contribution margin would be:
Fixed costs would remain same irrespective of the changes in sales volume. Also, Income from operations can be computed using the following formula:
Further, variances can be calculated using the following formula:
Therefore, flexible budget performance report as asked in the given problem is given below:
Flexible budget performance report for the year ended December 31, 2015 (Amount in $):
| Particulars | Flexible Budget | Actual Results | Variances | Favorable/ Unfavorable |
| Sales (18, 000 units) | 36, 00, 000 | 36, 48, 000 | 48, 000 | F |
| Variable costs: | ||||
| Direct materials | 11, 70, 000 | 11, 85, 000 | 15, 000 | U |
| Direct labor | 2, 70, 000 | 2, 78, 000 | 8, 000 | U |
| Machinery repairs | 72, 000 | 63, 000 | 9, 000 | F |
| Utilities | 54, 000 | 53, 000 | 1, 000 | F |
| Packaging | 90, 000 | 87, 500 | 2, 500 | F |
| Shipping | 1, 26, 000 | 1, 18, 500 | 7, 500 | F |
| Total variable costs | 17, 82, 000 | 17, 85, 000 | 3, 000 | U |
| Contribution margin | 18, 18, 000 | 18, 63, 000 | 45, 000 | F |
| Fixed costs: | ||||
| Depreciation- plant equipment | 3, 00, 000 | 3, 00, 000 | 0 | |
| Utilities | 1, 50, 000 | 1, 47, 500 | 2, 500 | F |
| Plant management salaries | 2, 00, 000 | 2, 10, 000 | 10, 000 | U |
| Sales salary | 2, 50, 000 | 2, 68, 000 | 18, 000 | U |
| Advertising expense | 1, 25, 000 | 1, 32, 000 | 7, 000 | U |
| Salaries | 2, 41, 000 | 2, 41, 000 | 0 | |
| Entertainment expense | 90, 000 | 93, 500 | 3, 500 | U |
| Total fixed costs | 13, 56, 000 | 13, 92, 000 | 36, 000 | U |
| Income from operations | 4, 62, 000 | 4, 71, 000 | 9, 000 | F |
Thus, income from operations of the company at flexible budget is coming out to be $4, 62, 000.
Concept introduction:
Sales variance:
It is the monetary difference between actual and budgeted sales. It is used to analyze changes in sales level over time. It can be calculated using the following formula:
Direct material cost variance:
It is the difference between
Requirement 2:
Analyze and interpret (a) sales variance and (b) direct materials cost variance.
Answer to Problem 2PSA
Sales variance of the company is favorable because the budgeted sales figure is less than that of actual sales during the period.
Direct material cost variance of the company is unfavorable due to the reason that the actual materials used were more than that of budgeted materials.
Explanation of Solution
Sales variance can be calculated using the following formula:
The calculation for same has been tabulated below:
| Particulars | Amount (In $) | Amount per unit (In $) |
| Budgeted sales (A) | 36, 00, 000 | 200 |
| Actual sales (B) | 36, 48, 000 | $36, 48, 000/ 18, 000 units = $202.67 |
| Sales variance (B-A) (Favorable) | 48, 000 | 2.67 |
Also, direct material cost variance can be computed using the below- mentioned formula:
The calculation for same has been tabulated below:
| Particulars | Amount (In $) | Amount per unit (In $) |
| Budgeted materials (A) | 11, 70, 000 | 65 |
| Actual materials used (B) | 11, 85, 000 | $11, 85, 000/ 18, 000 units = $65.83 |
| Direct materials cost variance (A-B) (Unfavorable) | 15, 000 | 0.83 |
Analysis of sales and direct materials cost variance:
Sales variance of the company is favorable because the budgeted sales figure is less than that of actual sales during the period. Also, per unit cost of actual sales is higher than that of budgeted sales.
Further, direct material cost variance of the company is unfavorable due to the reason that the actual materials used were more than that of budgeted materials. Also, per unit cost of actual materials is paid more than that estimated for budgeted materials.
Want to see more full solutions like this?
Chapter 8 Solutions
MANAGERIAL ACCOUNTING ACCT 2302 >IC<
- Marten Company has a cost-benefit policy to investigate any variance that is greater than 1,000 or 10% of budget, whichever is larger. Actual results for the previous month indicate the following: The company should investigate: a. neither the materials variance nor the labor variance. b. the materials variance only. c. the labor variance only. d. both the materials variance and the labor variance.arrow_forwardListed below are the budgeted factory overhead costs for 2011 for Moss Industries at a projected level of 2,000 units: Required: Prepare flexible budgets for factory overhead at the 1,000, 2,000, and 4,000 unit levels. (Hint: You must first decide which of the listed costs should be considered variable and which should be fixed.)arrow_forwardWhich of the following statements is not correct? A. The sales budget is computed by multiplying estimated sales by the sales price. B. The production budget begins with the sales estimated for each period. C. The direct materials budget begins with the sales estimated for each period. D. The sales budget is typically the first budget prepared.arrow_forward
- As part of its cost control program, Tracer Company uses a standard costing system for all manufactured items. The standard cost for each item is established at the beginning of the fiscal year, and the standards are not revised until the beginning of the next fiscal year. Changes in costs, caused during the year by changes in direct materials or direct labor inputs or by changes in the manufacturing process, are recognized as they occur by the inclusion of planned variances in Tracers monthly operating budgets. The following direct labor standard was established for one of Tracers products, effective June 1, 2012, the beginning of the fiscal year: The standard was based on the direct labor being performed by a team consisting of five persons with Assembler A skills, three persons with Assembler B skills, and two persons with machinist skills; this team represents the most efficient use of the companys skilled employees. The standard also assumed that the quality of direct materials that had been used in prior years would be available for the coming year. For the first seven months of the fiscal year, actual manufacturing costs at Tracer have been within the standards established. However, the company has received a significant increase in orders, and there is an insufficient number of skilled workers to meet the increased production. Therefore, beginning in January, the production teams will consist of eight persons with Assembler A skills, one person with Assembler B skills, and one person with machinist skills. The reorganized teams will work more slowly than the normal teams, and as a result, only 80 units will be produced in the same time period in which 100 units would normally be produced. Faulty work has never been a cause for units to be rejected in the final inspection process, and it is not expected to be a cause for rejection with the reorganized teams. Furthermore, Tracer has been notified by its direct materials supplier that lower-quality direct materials will be supplied beginning January 1. Normally, one unit of direct materials is required for each good unit produced, and no units are lost due to defective direct materials. Tracer estimates that 6 percent of the units manufactured after January 1 will be rejected in the final inspection process due to defective direct materials. Required: 1. Determine the number of units of lower quality direct materials that Tracer Company must enter into production in order to produce 47,000 good finished units. 2. How many hours of each class of direct labor must be used to manufacture 47,000 good finished units? 3. Determine the amount that should be included in Tracers January operating budget for the planned direct labor variance caused by the reorganization of the direct labor teams and the lower quality direct materials. (CMA adapted)arrow_forwardRefer to Cornerstone Exercise 8.13. In March, Nashler Company produced 163,200 units and had the following actual costs: Required: 1. Prepare a performance report for Nashler Company comparing actual costs with the flexible budget for actual units produced. 2. What if Nashler Companys actual direct materials cost were 1,175,040? How would that affect the variance for direct materials? The total cost variance?arrow_forwardUsing the information for Crable and Tesch, the systems consultants in P9-3 and P9-4, prepare a budgeted income statement for the year ended December 31, 2016.arrow_forward
- Flexible budgeting and variance analysis Im Really Cold Coat Company makes womens and mens coats. Both products require filler and lining material. The following planning information has been made available: Im Really Cold Coat Company does not expect there to be any beginning or ending inventories of filler and lining material. At the end of the budget year, Im Really Cold Coat Company experienced the following actual results: The expected beginning inventory and desired ending inventory were realized. Instructions 1. Prepare the following variance analyses for both coats and the total, based on the actual results and production levels at the end of the budget year: A. Direct materials price, quantity, and total variance. B. Direct labor rate, time, and total variance. 2. Why are the standard amounts in part (1) based on the actual production at the end of the year instead of the planned production at the beginning of the year?arrow_forwardCortez Manufacturing, Inc. has the following flexible budget formulas and amounts: Actual results for May for the production and sale of 5,000 units were as follows: Prepare a performance report for May that includes the identification of the favorable and unfavorable variances.arrow_forwardPreparing a performance report Use the flexible budget prepared in P7-6 for the 31,000-unit level and the actual operating results listed below for the 31,000-unit level. Required: 1. Prepare a performance report. 2. List the major reasons why the actual operating income at 31,000 units differs from the master budget operating income at 30,000 units in Figure 7-12. 3. Given the level at which the company operated, how was its cost control? Item Direct materials: Direct labor:arrow_forward
- Which approach is most likely to result in employee buy-in to the budget? A. top-down approach B. bottom-up approach C. total participation approach D. basing the budget on the prior yeararrow_forwardPreparing a performance report Use the flexible budget prepared in P7-6 for the 29,000-unit level of activity and the actual operating results listed below for the 29,000- unit level. Required: 1. Prepare a performance report. 2. List the major reasons why the actual operating income at 29,000 units differs from the master budget operating income at 30,000 units in Figure 7-12. 3. Given the level at which the company operated, how was its cost control? Item Direct materials: Direct labor:arrow_forwardData for Torleson Company are as follows: Required: 1. Calculate the sales price variance. 2. Calculate the sales volume variance. 3. Suppose that the product is in the introductory stage of the product life cycle. What information do these two variances provide to Torlesons managers?arrow_forward
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,