Question

TOPIC	Budgeting and Variance Analysis
ACTIVITY TITLE	Calculate the Marginal cost of the firm from the total cost with the help of diagram.
ACTIVITY DIRECTION & REQUIREMENT/S	The master (static) budget, flexible budget and Actual The following information has been gathered: Particulars Master Budget Flexible Budget Actual Results Units sold 1500 1200 1200 Revenue 150000 120000 125000 Direct Material Cost 72000 57600 62160 Direct Labour Cost 19200 ? 19800 Manufacturing Overheads 15000 ? 13050 Total Variable Costs ? ? ? Contribution Margin ? ? ? Fixed cost 27600 27600 28500 Net Income As the management accountant of the company prepare the Flexible budget variance, Sales volume variances and the static budget variance. Distinguish between the two broad components of the master budget. IKEA Bahrain manufactures tables for Schools in Bahrain. The master budget is based on sales of 20,000 units at BD100 Per table. Operating income is anticipated to be BD120,000. Budgeted variable costs are BD64 per unit, while fixed costs total BD 600,000. Actual income was BD 354,000 on actual Sales of 21,000 units at BD104 each. Actual variable Costs were BD 60 per unit and fixed costs totaled BD 570,000. Prepare a variance analysis report with both flexible budget and sales volume variances. Particulars Master Budget Sales Volume Variance Flexible Budget Flexible Budget Variance Actual Results Units sold 20000 21000 21000 Sales Revenue Variable Costs Contribution Margin Fixed cost Net Income

Answer 1

Part (a)

Particulars	Master Budget (1)	Flexible Budget   (2)	Actual Result   (3)	Flexible Budget Variance (3- 2)	Sales Volume Variance (2- 1)	Static Budget Varince (3-1)
Units Sold	1500	1200	1200
Revenue                                                  (A)	150000	120000	125000	5000 (F)	30000 (U)	25000 (U)
Direct Material Cost	72000	57600	62160	4560 (U)	14400 (F)	9840 (F)
Direct Labour Cost(Note -1)	19200	15360	19800	4440 (U)	3840 (F)	600 (U)
Manufacturing overhead (Note -2)	15000	12000	13050	1050 (U)	3000 (F)	1950 (F)
Total Varible cost (material + Labour+Manufacturing overhead)    (B)	106200	84960	95010	10050 (U)	21240 (F)	11190 (F)
Contribution margin (Note -3)      (A - B)	43800	35040	29990	5050 (U)	8760(U)	13810 (U)
Fixed Cost	27600	27600	28500	900(U)		900(U)
Net Income	16200	7440	1490	5950 (U)	8760 (U)	14710 (U)

Notes and explanations

F =Favorable variance

U = Unfavorable Variance

Note -1

Direct Labour Cost

For 1500 units it is 19200,Therefor per unit cost is 19200/1500 =12.8.

Therefore for 1200 units it is 1200 x 12.8 = 15360

Note -2

Manufacturing overhead

For 1500 units it is 15000,Therefor per unit cost is 15000/1500 =10

Therefore for 1200 units it is 1200 x 10 = 12000

Note -3

Contribution margin is the amount arrived by reducing variable cost from revenue.Fixed cost does not form part of this calculation

flexible budget variance

A flexible budget is a budget that shows differing levels of revenue and expense, based on the amount of sales activity that actually occurs. A flexible budget variance is any difference between the results generated by a flexible budget model and actual results

Sales volume variance

The sales volume variance for a product measures how much revenue the product brought in for the company based on actual sales volume, versus the revenue the company expected to make based on sales volume projections

Static Budet Variance

Static budget variances are the differences between what a company or individual thought it would spend in its budget versus what it actually did. To calculate a static budget variance, simply subtract the actual spend from the planned budget for each line item over the given time period.

Part (b)

Particulars	Master Budget (1)	Sales Volume Variance(2-1)	Flexible Budget(2)	Flexible Budget Variance(3-2)	Actual Result (3)
Unit Sold	20000		21000		21000
Sales Revenue	2000000	100000 (F)	2100000	84000 (F)	2184000
Variable cost	1280000	64000 (U)	1344000	84000 (F)	1260000
Contribution Margin	720000	36000 (F)	756000	168000 (F)	924000
Fixed Cost	600000	0	600000	30000 (F)	570000
Net Income	120000	36000 (F)	156000	198000 (F)	354000

Budgeted selling price	100
Actual selling price	104
Budgeted variable cost	64
Actual variable cost	60
Budgeted fixed cost	600000
Actual fixed cost	570000