Question

Smith Enterprises manufactures tires for the Formula 1 motor racing circuit. For August 2017​, it budgeted to manufacture and sell 3 comma 700 tires at a variable cost of $ 76 per tire and total fixed costs of $ 54 comma 000. The budgeted selling price was $ 108 per tire. Actual results in August 2017 were 3 comma 400 tires manufactured and sold at a selling price of $ 110 per tire. The actual total variable costs were $ 282 comma 200​, and the actual total fixed costs were $ 50 comma 500.

1. Prepare a performance report that uses a flexible budget and a static budget.

2. Comment on the results in requirement 1.

Answer 1

1) Solution:

	Actual Results	Flexible- Budget Variances	Flexible Budget	Sales-Volume Variances	Static Budget
	1	2 = 1 - 3	3	4 = 3-5	5
Actual tires	3400	0	3,400	300 U	3,700
Revenues	3400*110 = 374,000	6,800 F	3400*108 = 367,200	32,400 U	3700*108=399,600
Variable costs	282,200	40,800 U	3400*71=241,400	21,300 F	3700*71 = 262,700
Contribution Mragin	91800	34,000 U	125800	11,100 U	136900
Fixed cost	50,500	3,500 F	54,000	0	54,000
Operating income	41,300	30,500 U	71,800	11,100 U	82,900

　

Total flexible-budget variance 30,500 U

Total static-budget variance: 41,600 U

　

2)

	Actual	Budgeted
Units	3400	3700
Unit selling price	110	108
Unit variable cost	282200/3400 = 83	76
Fixed costs	50,500	54,000

The operating income in total static-budget variance is $41,600 U. The total flexible-budget variance is also unfavorable at ($30,500) and an unfavorable sales-volume variance ($11,100).