Question

The performance report compares data from Remember When’s Inc. static master budget with the actual costs of its Watch Division for the year ended December 31.

Remember When, Inc.

Performance Report-Watch Division

For the Year Ended December 31

Cost Category	Budgeted Costs *	Actual Costs †	Difference Under (Over) Budget
Direct materials	$42,000	$46,000	($4,000)
Direct labor	10,325	11,779	(1,454)
Variable overhead
Indirect materials	3,500	3,600	(100)
Indirect labor	5,250	5,375	(125)
Utilities	1,750	1,810	(60)
Other	2,100	2,200	(100)
Fixed overhead
Supervisory salaries	4,000	3,500	500
Depreciation	2,000	2,000	----
Utilities	450	450	----
Other	3,000	3,200	(200)
Totals	$74,375	$79,914	($5,539)

* Budgeted costs are based on an output of 17,500 units.

† Actual output was 19,100 units.

Actual costs exceeded budgeted costs by $5,539, or 7.4 percent. On the face of it, most managers would consider such a cost overrun significant. But was there really a cost overrun? The budgeted amounts are based on sales of 17,500 units at $8 each; however, actual sales was 19,100 units for a total sales of $143,250. “Remember When, Inc. uses a Just In Time inventory system and thus does not have any beginning or ending inventory. Output are units sold.

Required:

Construct a flexible budged performance report and explain activity (volume), revenue, and spending variances.

Check Figures: Activity (Volume) Variance – Revenue 12,800F, Variable Costs 5,936U,

Net Income 6,864F

                        Revenue Variance – 9,550U

Spending Variance – Total Variable Costs 97F,

                  

                             - Total Fixed Costs 300F

Activity (volume) generated $6,864 additional profit, but the revenue variance was unfavorable by $9,550. Fixed and variable costs were close to flexible budge amounts, so income is down overall due to poor revenue management

Answer 1

	Actual Results	Revenue Spending Variance		Flexible Budget	Activity Variance		Static Budget
Unit sales	19100			19100	100	F	17500
Sales Revenue	$      143,250	$           9,550	U	$      152,800	$         12,800	F	$      140,000
Less : Variable Expenses
Direct Material	$         46,000	$              160	U	$         45,840	$           3,840	U	$        42,000
Direct Labor	$         11,779	$              510	U	$         11,269	$              944	U	$        10,325
Overhead
Indirect Material	$           3,600	$              220	F	$           3,820	$              320	U	$           3,500
Indirect Labor	$           5,375	$              355	F	$           5,730	$              480	U	$           5,250
Utilities	$           1,810	$              100	F	$           1,910	$              160	U	$           1,750
Other	$           2,200	$                92	F	$           2,292	$              192	U	$           2,100
Total Variable Expenses	$         70,764	$                97	F	$         70,861	$           5,936	U	$        64,925
Contribution Margin	$         72,486	$           9,453	U	$         81,939	$           6,864	F	$        75,075
Less : Fixed Overhead
Supervisory Salaries	$           3,500	$              500	F	$           4,000	$                 -	None	$           4,000
Depreciation	$           2,000	$                 -	None	$           2,000	$                 -	None	$           2,000
Utilities	$              450	$                 -	None	$              450	$                 -	None	$              450
Other	$           3,200	$              200	U	$           3,000	$                 -	None	$           3,000
Total Fixed Expenses	$           9,150	$              300	F	$           9,450	$                 -	None	$           9,450
Operating Income	$         63,336	$           9,153	U	$         72,489	$           6,864	F	$        65,625