Question

You have been called in as a consultant for Palo, Inc a manufacturer of shower radios. Although Palo's management is very happy they reported $2,478 more in net operating income for the month than expected, they want to know why net operating income is higher especially since demand for the radios dropped. Information regarding the most recent month follows:

	budget	actual
Units	11000	10500
Sales	$ 440000	$ 430500
Variable expenses
Variable cost of goods sold	$ 352000	339297
Variable selling expenses	$ 33000	34125
Total expenses	$ 385000	373422
Contribution margin	$ 55000	57078

Fixed expenses
Fixed Cost of goods sold	$30000	29400
Fixed Cost of goods sold	$12000	12200
Total Fixed cost	$42000	41600
Net Operating Incom	$13000	15478

Standard Information:

Particulars	Quantity	Price/Rate	Standard Cost
Direct Materials	2.0 Pounds	$5 per pound	$10
Direct Labor	1.5 Hours	$14 per hour	$21
Variable manafacturing overhead	0.50 Machine Hours	$2 per MH	$1
Total Standard Cost			$32.00

Actual Information:

Actual quantity of materials used and purchased is 23,100 pounds.

Actual amount spent on direct materials is $117,117

Average rate paid for direct labor for the month was $14.40 per hour

The only variance in variable manufacturing overhead was due to activity level.

Required:  

Prepare a memo, in good form, to Palo's management explaining why actual net income was higher than budget. Also make a recommendation as to what items they might want to investigate using a 5% variance from the flexible budget as your guide.    Keep these things in mind when preparing your memo:

1) You should provide specific evidence to support your explanation.

2) Explanations should lead with the item having the most significant impact.

3) Your memo should be prepared in good form. Remember to use the guidelines provided from the previous memo assignment.

4) You need to include a visual( a graph) to help communicate your explanation and/or recommendation.

Keep in mind that Palo's Management are not accountants but possess general business knowledge(explain in layman's terms).

this is all the data/info/details that are given; which is why I am seeking help lol.

Answer 1

MEMO FOR DETAILED ANALYSIS OF ACTUAL NET PROFIT:

PARTICULARS BUDGETTED ACTUAL VARIANCE(+/-)

UNITS: 10500

SALES $ 420000 $ 430500 +10500 (INC IN SALE PRICE) - A

VARIABLE COST OF GOODS SOLD:

DIRECT MATERIAL QTY 21000 23100 -2100 (EXCESS QTY USED)

@ 5 5.07 - 0.07 (EXCESS RATE)

   $ 105000 $ 117117   -12117 (ADVERSE) - B

DIRECT LABOUR 1.5*10500 = 15750 14700* (NOTE 2) + 1050 (EFFICIENCY)

@ 14 @14.40 -.40 (ADVERSE)

$ 220500 $ 211680 + 8820  (NOTE 1) -C

VARIABLE OH $ 10500 $ 10500 NIL

TOTAL   $ 336000 $ 339297 + 7203 (A+B+C = D)

VARIABLE SELLING EXPENSES $ 31500 $ 34125 - 2625 (E)

FIXED OVERHEAD $ 42000 $ 41600 +400 (F)

TOTAL COST $ 409500 $ 415022   

NET PROFIT $ 10500 $ 15478 +4978 (D+E+F)

DECREASE IN SALE 500 UNITS

CONTRIBUTION 0PER UNIT = $ 5

DECREASE IN CONTIBUTION DUE TO DECREASE IN SALE = $5* 500 = $ 2500

NET ACTUAL PROFIT = $4978 -$ 2500 = $ 2478

NOTE 1: SINCE THE ONLY VARIABLE OH VARIANCE WAS DUE TO ACTIVITY LEVEL, THEREFORE TOTAL VARIABLE OH WILL BE ACTUAL UNIT PRODUCED INTO RATE PER VARIABLE OH AS THERE IS NO CHANGE IN RATE OF VARIABLE OH PER UNIT.

NOTE 2 : LABOUR COST = TOTAL VARIABLE COST OF GOOD SOLD - TOAL MATERIAL COST- TOTAL VARIALE MANUFACTURING OH

= 339297-117117-10500 = 211680

LABOUR RATE = $ 14.40

TOTAL HOURS = 211680/14.40 = 14700

RECOMMENDATION TO MANAGEMENT: MANAGEMENT SHOULD CONSIDER LABOUR COST USING 5% VARIANCE FROM FLEXIBLE BUDGET AS IT IS EXTREMELY FAVOURABLE DUE TO HIGHER LABOUR EFFICIENCY.