Question

Birken Company manufactures shopping bags made of recycled plastic that it plans to sell for $5 each. Birken budgets production and sales of 800,000 bags for 2014, with a standard of 400,000 machine-hours for the whole year. Budgeted fixed overhead costs are $500,000, and variable overhead cost is $1.60 per machine-hour.Because of increased demand, Birken actually produced and sold 900,000 bags in 2014, using a total of 440,000 machine-hours. Actual variable overhead costs are $699,600 and actual fixed overhead is $501,900. Actual selling price is $6 per bag.Direct materials and direct labor actual costs were the same as standard costs, which were $1.20 per unit and $1.80 per unit, respectively.

1.

Calculate the variable overhead and fixed overhead variances (spending, efficiency, spending and volume)

2.Create a chart showing the Flexible Budget Variances and Sales Volume Variances for revenue, costs, contribution margin and operating income.

3.Calculate the operating income based on budgeted profit "per shopping bag".

4.Reconcile the budgeted operating income from requirement 3 to the actual operating income from your chart in requirement 2.

5.Calculate the operating income volume variance and show how the sales volume variance is comprised of the producti

on volume variance and the operating income volume variance

Answer 1

Variable overhead variances

Fixed overhead variances

2

	Actual	Flexible-Budget	Flexible Budget	Sales-Volume	Static
	Results	Variances	-3	Variances	Budget
	-1	(2) = (1) – (3)		(4) = (3) – (5)	-5
Units sold	900,000		900,000		800,000
Unit price	$6		$5		$5
Revenues	$5,400,000	$900,000 F	$4,500,000	$500,000 F	$4,000,000
Variable costs
Direct materials	1,080,000	0	1,080,000	120,000 U	960,000
Direct labor	1,620,000	0	1,620,000	180,000 U	1,440,000
Variable overhead	699,600	20,400 F	720,000	80,000 U	640,000
Total variable costs	3,399,600	20,400 F	3,420,000	380,000 U	3,040,000
Contribution margin	2,000,400	920,400 F	1,080,000	120,000 F	960,000
Fixed manufacturing costs	501,900	1,900 U	500,000	0	500,000
Operating income	$1,498,500	$918,500 F	$580,000	$120,000 F	$460,000

3

Budgeted cost per shopping bag:
Direct materials per bag (given)	$1.20
Direct labor per bag (given)	1.8
Variable overhead ($1.6 per hour × 0.5 MH)	0.8
Fixed overhead ($1.25 per hour × 0.5 MH)	0.625
Total	$4.425

Budgeted sales revenue, 900,000 actual units sold
900,000 × $5	$4,500,000
Budgeted Cost of Goods sold
900,000 × $4.425	3,982,500
Budgeted operating income	$517,500

4

Budgeted operating income (calculated in 3)	$517,500
Add: favorable volume variance (calculated in 1)	58,750
Flexible budget operating income	$580,000
Add: Favorable flexible budget variance	918,500
Actual operating income	$1,498,500

5

Operating income volume variance:

Budgeted operating income for actual output – static budget operating income

= $517,500 – $460,000

= $57,500 F

Sales volume variance = $116,250 F

= production volume variance + operating income volume variance

= $58,750 + $57,500

= $116,250 F