Question

Assume that in October 2019 the Schmidt Machinery Company manufactured and sold 900 units for $710 each. During this month, the company incurred $387,000 total variable costs and $180,500 total fixed costs. The master (static) budget data for the month are as given in Exhibit 14.1. Required: 1. Prepare a flexible budget for the production and sale of 900 units. 2. Compute for October 2019: a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable (F) or unfavorable (U). b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable (F) or unfavorable (U). 3. Compute for October 2019: a. The total flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U). b. The total variable cost flexible-budget variance. Indicate whether this variance was favorable (F) or unfavorable (U). c. The total fixed cost flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U). d. The selling price variance. Indicate whether this variance was favorable (F) or unfavorable (U).

Given

Machinery Co.

	actual op. income	master budget	variances
units	780	1000	220 unfavorable
sales	639600 @100%	800,000 @100%	160400 unfavorable
variable costs.	350950 @55%	450,000 @56%	99,050 favorable
contribution margin	288650 @45%	350,000 @ 44%	61,350 unfavorable
fixed costs	160650 @25	150,000 @19%	10,650 unfavorable
operating income	128,000 @20%	200,000 @25%	72,000 unfavorable

actual fixed OH cost =$130,650

actual fixed selling and admin costs= $30,000

budgeted fixed factory OH costs =$120,000

budgeted fixed selling and admin costs=$30,000

1. fill in blanks

Prepare a flexible budget for the production and sale of 900 units.

unit sold
sales
	$
	$

2.

Compute for October 2019:

a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable (F) or unfavorable (U).

b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable (F) or unfavorable (U).

3.

Compute for October 2019:

a. The total flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

b. The total variable cost flexible-budget variance. Indicate whether this variance was favorable (F) or unfavorable (U).

c. The total fixed cost flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

d. The selling price variance. Indicate whether this variance was favorable (F) or unfavorable (U).

Answer 1

1. Prepare a flexible budget for the production and sale of 900 units

.

standard Price per = Cost / unit

Units sold and produced 1000

Sales = 800000

Standard Selling price = 800000 / 1000 = 800

Variable Costs 450000

Standard Variable Costs per units = 450000 / 1000 = 450

Flexible Budget @ 900 unnits
Units	900
sales ( 900 units * 800 )	$720000
Variable cost ( 450 * 900 units)	405000
Contribution margin	$315000
Fixed cost	150000
Operating income	$165000

.

2.

Compute for October 2019:

a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable (F) or unfavorable (U).

.

Sales Volume variance (Operating Income) = Flexible Budget Operating Income – Master Budget Operating

Income

Flexible Budget Operating Income @ 900 units = $165000

Less: Master Budget Operating Income (Static ) = $200000

Sales Volume variance (Operating Income) = $35000 - (U)

.

b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable (F) or unfavorable (U).

.

Sales Volume variance (Contribution margin) = Flexible Budget Contribution Margin – Master Budget Contribution

Flexible Budget Contribution Margin = $315000

Less: Master Budget Contribution = $350000

Sales Volume variance (Contribution margin) = $35000 (U)

.

3.

Compute for October 2019:

a. The total flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

.

Prepare actual budget @900 units

Company manufactured and sold 900 units for $710 each.

During this month, the company incurred $387,000 total variable costs and $180,500 total fixed costs.

Actual Budget @ 900 unnits
Units	900
sales ( 900 units * 710 )	$639000
Variable cost ( 900 units)	387000
Contribution margin	$252000
Fixed cost	180500
Operating income	$71500

.

Total Flexible Budget Variance= Actual Operating Income-Flexible Budget Operating Income

Actual Operating Income = $71500

Less: lexible Budget Operating Income = $165000

Total Flexible Budget Variance= 71500 - 165000 = $93500 (U)

.

b. The total variable cost flexible-budget variance. Indicate whether this variance was favorable (F) or unfavorable (U).

.

Total Variable Cost Flexible-Budget Variance = Actual Variable Cost - Flexible Budget Variable Cost

Actual Variable Cost = $387000

Flexible Budget Variable Cost = $405000

Total Variable Cost Flexible-Budget Variance = 387000 - 405000 = 18000 (F)

.

c. The total fixed cost flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

.

Total Fixed Cost flexible Budget variance = Actual Fixed Costs – Flexible Budget Fixed Costs

Actual Fixed Costs = $180500

Flexible Budget Fixed Costs = $150000

Total Fixed Cost flexible Budget variance = 180500 - 150000 = 30500 (U)

.

d. The selling price variance. Indicate whether this variance was favorable (F) or unfavorable (U).

.

Selling Price Variance = Actual Sales Revenue – Flexible Budget Sales revenue

Actual Sales Revenue = $639000

Flexible Budget Sales revenue = $720000

Selling Price Variance = 639000 - 720000 = 81000 (U)