Question

Honeywell manufacturer of fireplaces, had planned to produce and sell 2,500 units at $105.00 per unit. Budgeted variable manufacturing costs per unit are $20.00. Honeywell pays its salespeople a 5% sales commission, which is the only non-variable manufacturing cost for the company. Fixed costs are budgeted as follows: manufacturing, $40,000 and marketing, $30,000.

Actual financial results for the period were as follows. Sales volume was up at 2,750 units sold and actual sales revenue for the period was $260,000. Fixed expenses were less than budgeted by $5,000 and actual variable manufacturing costs were $25.00 per unit. Sales commissions remained at 5%.

Calculate each of the following variances

• Total Operating Income Variance
• Flexible-budget variance for operating income
• Flexible-budget variance for total variable costs
• Flexible-budget variance for total fixed costs
• Sales volume variance for operating income

Answer 1

					Actual	Flexible budget	Static budget
	Sales volume		(in units)		2750	2750	2500
	Sales revenue				260000	288750	262500
						(2750*105)	(2500*105)
	Less: Variable expenses
	Manufacturing costs				68750	55000	50000
					(2750*25)	(2750*20)	(2500*20)
	Sales commission		(5% of sales revenue)		13000	14437.5	13125
	Total variable expenses				81750	69437.5	63125
	Contribution margin				178250	219312.5	199375
	Less; Fixed expenses
	Manufacturing costs					40000	40000
	Marketing costs					30000	30000
	Total fixed expenses		(70000-5000)		65000	70000	70000
	Operating income				113250	149312.5	129375
	Total Operating Income Variance=Operating income as per actual-Operating income as per static budget
	If the answer is positive,variance is favorable.Otherwise,unfavorable.
	Total Operating Income Variance=113250-129375=-16125=$ 16125 unfavorable
	Flexible-budget variance for operating income=Operating income as per actual-Operating income as per flexible budget
	If the answer is positive,variance is favorable.Otherwise,unfavorable.
	Flexible-budget variance for operating income=113250-149312.5=-36062.5=$ 36062.5 unfavorable
	Flexible-budget variance for total variable costs=Total variable costs as per flexible budget-Total variable costs as per actual budget
	If the answer is positive,variance is favorable.Otherwise,unfavorable.
	Flexible-budget variance for total variable costs=69437.5-81750=-12312.5=$ 12312.5 Unfavorable
	Flexible-budget variance for total fixed costs=Total fixed costs as per flexible budget-Total fixed costs as per actual budget
	If the answer is positive,variance is favorable.Otherwise,unfavorable.
	Flexible-budget variance for total fixed costs=70000-65000=$ 5000 favorable
	Sales volume variance for operating income=Operating income as per flexible budget-Operating income as per static budget
	If the answer is positive,variance is favorable.Otherwise,unfavorable.
	Sales volume variance for operating income=149312.5-129375=$ 19937.5 Favorable