Question

3. Phoenix Company’s 2019 master budget included the following fixed budget report. It is based on an expected production and sales volume of 17,000 units.

PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2019
Sales				$	4,250,000
Cost of goods sold
Direct materials	$	850,000
Direct labor		170,000
Machinery repairs (variable cost)		51,000
Depreciation—Plant equipment (straight-line)		315,000
Utilities ($34,000 is variable)		194,000
Plant management salaries		215,000			1,795,000
Gross profit					2,455,000
Selling expenses
Packaging		68,000
Shipping		102,000
Sales salary (fixed annual amount)		270,000			440,000
General and administrative expenses
Advertising expense		127,000
Salaries		251,000
Entertainment expense		100,000			478,000
Income from operations				$	1,537,000

Phoenix Company’s actual income statement for 2019 follows.

PHOENIX COMPANY Statement of Income from Operations For Year Ended December 31, 2019
Sales (20,000 units)				$	5,078,000
Cost of goods sold
Direct materials	$	1,016,000
Direct labor		208,000
Machinery repairs (variable cost)		51,000
Depreciation—Plant equipment (straight-line)		315,000
Utilities (fixed cost is $157,500)		197,000
Plant management salaries		224,000			2,011,000
Gross profit					3,067,000
Selling expenses
Packaging		77,500
Shipping		112,000
Sales salary (annual)		287,000			476,500
General and administrative expenses
Advertising expense		135,000
Salaries		251,000
Entertainment expense		104,000			490,000
Income from operations				$	2,100,500

Required:
1. Prepare a flexible budget performance report for 2019. (Indicate the effect of each variance by selecting for favorable, unfavorable, and No variance.)

Answer 1

Solution:

Phoenix Company
Flexible Budget Performance Report
For the year ended Dec 31, 2019
Particulars	Flexible Budget	Actual results	Variances	Fav. / Unfav.
Sales	$50,00,000.00	$50,78,000.00	$78,000.00	Favorable
Variable Costs:
Direct Materials	$10,00,000.00	$10,16,000.00	$16,000.00	Unfavorable
Direct Labor	$2,00,000.00	$2,08,000.00	$8,000.00	Unfavorable
Machinery Repairs	$60,000.00	$51,000.00	$9,000.00	Favorable
Utilities	$40,000.00	$39,500.00	$500.00	Favorable
Packaging	$80,000.00	$77,500.00	$2,500.00	Favorable
Shipping	$1,20,000.00	$1,12,000.00	$8,000.00	Favorable
Total Variable Costs:	$15,00,000.00	$15,04,000.00	$4,000.00	Unfavorable
Contribution	$35,00,000.00	$35,74,000.00	$74,000.00	Favorable
Fixed Costs:
Depreciation - Plant & Equipment	$3,15,000.00	$3,15,000.00	$0.00	Neither favorable nor unfavorable
Utilities	$1,60,000.00	$1,57,500.00	$2,500.00	Favorable
Plant mangement salaries	$2,15,000.00	$2,24,000.00	$9,000.00	Unfavorable
Sales Salary	$2,70,000.00	$2,87,000.00	$17,000.00	Unfavorable
Advertising Expense	$1,27,000.00	$1,35,000.00	$8,000.00	Unfavorable
Salaries	$2,51,000.00	$2,51,000.00	$0.00	Neither favorable nor unfavorable
Entertainment Expenses	$1,00,000.00	$1,04,000.00	$4,000.00	Unfavorable
Total Fixed Costs	$14,38,000.00	$14,73,500.00	$35,500.00	Unfavorable
Net Operating Income	$20,62,000.00	$21,00,500.00	$38,500.00	Favorable