Question

7-23 Flexible-budget preparation and analysis. XYZ Printers, Inc., produces luxury checkbooks with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer’s bank. The company’s operating budget for September 2017 included these data:

Number of checkbooks	20,000
Selling price per book	$ 22
Variable cost per book	$ 9
Fixed costs for the month	$150,000

The actual results for September 2017 were as follows:

Number of checkbooks produced and sold	15,000
Average Selling price per book	$ 23
Variable cost per book	$ 8
Fixed costs for the month	$155,000

The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. As the company’s management accountant, you have been asked to provide explanations for the disappointing September results.

XYZ develops its flexible budget on the basis of budgeted per-output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs.

Required:

1. Prepare a static-budget-based variance analysis of the September performance.

2. Prepare a flexible-budget-based variance analysis of the September performance.

3. Why might XYZ printers find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis? Explain your answer.

Please write on the computer, not by hand wriring

Answer 1

1. Preparation of static budget variance analysis for September performance

Particulars	Actual results	Static Budget	Static budget Variance (Favorable / Unfavorable )
Units sold	15,000 units	20,000	5000 U
Revenues	$ 3,45,000 (15,000 units * $ 23)	$ 4,40,000 20,000 units*$ 22	$ 95,000 U
Variable costs	($ 1,20,000) (15000 units *$8)	($ 1,80,000) (20,000 units *$ 9)	$ 60,000 F
Contribution margin (Revenues – Variable cost)	$ 2,25,000 ($ 3,45,000 -$ 1,20,000)	$ 2,60,000 ($ 4,40,000 -$ 1,80,000)	$ 35,000 U
Fixed costs	($ 1,55,000)	($ 1,50,000)	$ 5000 U
Operating income (Contribution margin – Fixed costs)	$ 70,000	$ 1,10,000	$ 40,000 U

2.  Preparation of flexible budget variance analysis for September performance

Particulars	Actual results	Flexible Budget	Flexible budget Variance (Favorable / Unfavorable )
Units sold	15,000 units	15,000 units	-
Revenues	$ 3,45,000 (15,000 units * $ 23)	$ 3,30,000 (15,000 units*$ 22)	$ 15,000 F
Variable costs	($ 1,20,000) (15000 units *$8)	($ 1,35,000) (15,000 units *$ 9)	$ 15,000 F
Contribution margin (Revenues – Variable cost)	$ 2,25,000 ($ 3,45,000 -$ 1,20,000)	$ 1,95,000 ($ 3,30,000 - $1,35,000)	$ 30,000 F
Fixed costs	($ 1,55,000)	($ 1,50,000)	$ 5000 U
Operating income (Contribution margin – Fixed costs)	$ 70,000	$ 45,000	$ 25,000 F

Solution 3:

A) Flexible budget base variance analysis gives you a further break down of static budget into flexible budget variance and sales volume variance.

B) Flexible budget variance will help to understand what results we should have for the given level of output as to what level of actual output was attained .

C) Flexible budget variances can be used to identify any shortcomings in actual performance during a given period.

D) Any comparison between actual results and a flexible budget is more useful than a comparison with static budget especially if the actual activity level significantly shows variance from the budgeted activity level. This makes a flexible budget a powerful performance evaluation tool.

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