In: Accounting
Budget Variance Analysis
Hertzler Corporation uses customers served as its measure of
activity. During November, the company budgeted for 23,000
customers, but actually served 25,000 customers. The company uses
the following revenue and cost formulas in its budgeting, where q
is the number of customers served:
Revenue: $7.25q
Wages and salaries: $30,500 + $2.30q
Supplies: $0.80q
Insurance: $6,200
Miscellaneous: $8,750 + $0.30q
The company reported the following actual results for November:
Revenue | $ 185,000 |
Wages | $ 95,000 |
Supplies | $ 19,500 |
Insurance | $ 6,500 |
Misc | $ 15,000 |
Required:
Prepare a net income report showing the company's revenue and
spending variances for November. Label each variance as favorable
(F) or unfavorable (U). Make sure it is formatted based on an
income statement and show the actual and the budgeted side by side.
(2 questions in 1 – Create Budget, then Compare Budget with Actual
results, which will allow to figure the amount of variance and if
it is Favorable or Unfavorable)
Ans. | HERTZLER CORPORATION | |||||
Revenue and Spending Varinance | ||||||
For the Month Ended November 30 | ||||||
Actual Results | Revenue & Spending variance | Flexible Budget | ||||
Customers served | 25,000 | 25,000 | ||||
Revenue | $185,000 | $3,750 | F | $181,250 | ||
Expenses: | ||||||
Wages and salaries | $95,000 | $7,000 | U | $88,000 | ||
Supplies | $19,500 | -$500 | F | $20,000 | ||
Insurance | $6,500 | $300 | U | $6,200 | ||
Miscellaneous expense | $15,000 | -$1,250 | F | $16,250 | ||
Total expenses | $136,000 | $5,550 | U | $130,450 | ||
Net operating income | $49,000 | -$1,800 | U | $50,800 | ||
*Flexible budget is prepared on the basis of actual units. | ||||||
*Fixed expenses remain same as planning budget. | ||||||
*Calculation of Flexible budget: | ||||||
Flexible Budget | ||||||
Customers served | 25,000 | |||||
Revenue | $7.25 * 25,000 | |||||
Expenses: | ||||||
Wages and salaries | $30,500 + (25,000 * $2.30) | |||||
Supplies | $0.80 * 25,000 | |||||
Insurance | $6,200 | |||||
Miscellaneous expense | $8,750 + (25,000 * $0.30) | |||||
Revenue & Spending variance = Actual results - Flexible budget | ||||||
*Increase in revenue or net operating income from flexible budget to actual results = Favorable. | ||||||
*Decrease in revenue or net operating income from flexible budget to actual results = Unfavorable. | ||||||
*Increase in expenses from flexible budget to actual results = Unfavorable. | ||||||
*Decrease in expenses from flexible budget to actual results = Favorable. |