In: Accounting
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
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.