Question

 Flexible Budgets; Total Operating Income Variance; Breakdown of the Total Operating Income Variance; Spreadsheet Application The following information is available for Brownstone Products Company for the month of July:   Actual   Master Budget Units   3,800   4,000 Sales revenue   $53,200   $60,000 Variable manufacturing costs   19,000   16,000 Fixed manufacturing costs   16,000   15,000 Variable selling and administrative expenses   7,700   8,000 Fixed selling and administrative expenses   10,000   9,000 Required What was the total operating income variance for July, rounded to the nearest whole dollar? (Note: This variance is also called the master (static) budget variance for the period.) Was this variance favorable (F) or unfavorable (U)? Set up a spreadsheet to compute the July sales volume variance and the flexible-budget variance for the month, both in terms of contribution margin and in terms of operating income. Round all dollar amounts to the nearest whole number. Discuss implications of these variances on strategic cost management for Brownstone. Configure your spreadsheet so that it will allow the firm to prepare pro-forma budgets for activities within its relevant range of operations. Use your spreadsheet to prepare a flexible budget for each of the following two output levels (round all dollar amounts in the flexible budgets to the nearest whole number): 3,750 units. 4,150 units.

Show formulas used.

Answer 1

Particular	Actual	Flexible budget variance	Favourable/unfavourable	Flexible budget	Sales Volume variance	Favourable/unfavourable	Master budget
Units	3800	0		3800	200	U	4000
Sales	53200	3800	U	57000	3000	U	60000
Variable costs
#Manufacturing	19000	3800	U	15200	800	F	16000
# Selling and administrative	7700	100	U	7600	400	F	8000
Total variable costs	26700	3900	U	22800	1200	F	24000
Contribution margin	26500	7700	U	34200	1800	U	36000
Fixed Costs
# Manufacturing	16000	1000	U	15000			15000
# Selling and administrative	10000	1000	U	9000			9000
Total fixed costs	26000	2000	U	24000			24000
Operating income	500	9700	U	10200	1800	U	12000

Calculations:-

Particular	Master Budget	Actual
Units	4000	3800
Sales Revenue	60000	53200
Selling Price per unit	15	14
Variable manufacturing costs	16000	19000
Variable manufacturing costs per unit	4	5
Fixed manufacturing costs	15000	16000
Variable Selling and administrative cost	8000	7700
Variable Selling and administrative cost per unit	2	2
Fixed Selling and administrative cost	9000	10000

The company is using cost leadership, not differentiation, competetive strategy for the product. Unless the company gets its cost under control, it will likely not be able to compete successfully as a cost leader or low cost producer

The company has unfavourable selling price and sales volume variance. The xompany reduces its selling price but still fails to attain the budgeted Sales volume.

Flexible budget in different levels:-

Particular	Flexible budget	Flexible budget
Units	3750	4150
Sales	56250	62250
Variable costs
#Manufacturing	15000	16600
# Selling and administrative	7500	8300
Total variable costs	22500	24900
Contribution margin	33750	37350
Fixed Costs
# Manufacturing	15000	15000
# Selling and administrative	9000	9000
Total fixed costs	24000	24000
Operating income	9750	13350