Question

In: Accounting

The actual information pertains to the third quarter. As part of the budgeting process, the controller...

The actual information pertains to the third quarter. As part of the budgeting process, the controller for Foley Manufacturing had developed the following static budget for the third quarter. The primary reason for high actual operating profits was ________.

                                                  Actual            Flexible                Static

                                                 Results             Budget             Budget

Sales volume (in units)                 11,000                                       10,000

Sales revenues                          $238,000         $                         $230,000

Variable costs                             150,000        $ ________             180,000

Contribution margin                    88,000         $                            50,000

Fixed costs                                  36,000        $ ________               35,000

Operating profit                        $ 52,000         $                          $ 15,000

Select one:

a. increased fixed costs

b. lower sales volume than planned

c. the variable-cost variance

d. flexible budget variance for revenues

Solutions

Expert Solution

The right option is " c. the variable-cost variance ".

The first option is right because the fixed costs has increased by $1,000 which reduces the operating income and not increases. Therefore, it is wrong answer,

The sales volume has increased from 10,000 units to 11,000 units which means that the total revenues have increased as can be seen in the question. Therefore, this option is also wrong.

The third option is right. As the variable cost to sales ratio has reduced from 78.26% to 63.03%. This shows that the actual contribution has increased as compared to the static budget.
Variable cost to sales ratio ( static budget ) = Variable costs / Sales revenues = $180,000 / $230,000 = 78.26%
Variable cost to sales ratio ( actual result ) = Variable costs / Sales revenues = $150,000 / $238,000 = 63.03%

The last option is also wrong as the sales revenues have only increased by $8,000 as compared to the $30,000 decrease in variable costs.
This makes the variable cost variance the primary reason for high actual operating profits.


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