Question

Net operating income for the Midal Company for 2018 was:

Sales (45,000 units)		$450,000
Cost of goods sold:
Direct materials	$ 90,000
Direct labor	67,500
Variable overhead	27,000
Fixed overhead	45,000	$229,500
Gross margin		$220,500
Selling and administrative expenses:
Fixed	$140,500
variable	27,000	167,500
Net operating income		$ 53,000

To prepare the budget for 2019, sales are forecasted at a 20% volume increase with no change in sales price or variable costs per unit. Fixed overhead was budgeted to be $45,000. Fixed selling and administrative expenses are budgeted to increase by $4,500. Sales and production volume are expected to be equal, and there are no beginning or ending inventories of work in process or finished goods.

The actual operating data for 2019 are:

Sales ($10 per unit)	$517,500
Direct materials	105,750
Direct labor	78,750
Variable overhead	30,376
Fixed overhead	46,124
Variable selling and administrative expenses	31,050
Fixed selling and administrative expenses	145,428

a.      Prepare a report comparing the master 2019 operating budget with actual data for 2019. Do not calculate budget variances.

b.      Prepare a budget report comparing flexible operating budget amounts with actual data for 2019. Calculate budget variances.

Answer 1

a.

	Actual	Master Budget
Sales	$        5,17,500	$           4,50,000
Variable Costs
Direct materials	$        1,05,750	$               90,000
Direct labor	$           78,750	$               67,500
Variable overhead	$           30,376	$               27,000
Variable Selling and administrative expenses	$           31,050	$               27,000
Total Variable Costs	$        2,45,926	$           2,11,500
Contribution Margin	$        2,71,574	$           2,38,500
Fixed Costs
Fixed overhead	$           46,124	$               45,000
Fixed Selling and administrative expenses:	$        1,45,428	$           1,40,500
Total Fixed Costs	$        1,91,552	$           1,85,500
Net operating income	$           80,022	$               53,000

b.

	Actual	Flexible Budget	Variance
Sales	$        5,17,500	$           5,17,500	$                  -
Variable Costs
Direct materials	$        1,05,750	$           1,03,500	$           2,250	U
Direct labor	$           78,750	$               77,625	$           1,125	U
Variable overhead	$           30,376	$               31,050	$               674	F
Variable Selling and administrative expenses	$           31,050	$               31,050	$                  -
Total Variable Costs	$        2,45,926	$           2,43,225	$           2,701	U
Contribution Margin	$        2,71,574	$           2,74,275	$           2,701	U
Fixed Costs
Fixed overhead	$           46,124	$               45,000	$           1,124	U
Fixed Selling and administrative expenses:	$        1,45,428	$           1,40,500	$           4,928	U
Total Fixed Costs	$        1,91,552	$           1,85,500	$           6,052	U
Net operating income	$           80,022	$               88,775	$           8,753	U