Question

The following information is available for Brownstone Products Company for the month of July:

	Actual			Master Budget
Units		3,900			4,000
Sales revenue	$	60,400		$	60,000
Variable manufacturing costs		20,400			16,000
Fixed manufacturing costs		14,200			13,300
Variable selling and administrative expenses		9,100			8,000
Fixed selling and administrative expenses		10,500			10,200

Required:

1. What was the total operating income variance for July? (Note: this variance is also called the master (static) budget variance for the period.) Was this variance favorable (F) or unfavorable (U)?

2. Compute the July sales volume variance and the flexible-budget variance for the month, both in terms of contribution margin and in terms of operating income.

4. Prepare pro forma budgets for activities within its relevant range of operations. Prepare a flexible budget for each of the following two output levels:

a. 3,890 units.

b. 4,290 units.

Answer 1

			Actual	Flexible budget variance		Flexible budget	Sales volume variance		Planning budget
	Units		3900			3900			4000
	Sales revenue		60400	1900	F	58500	1500	U	60000
Less	Variable expense
	Manufacturning overheads		20400	4800	U	15600	400		16000
	Selling and administrative		9100	1300	U	7800	200		8000
	Contribution margin		30900	4200	U	35100	900	U	36000
Less	Fixed cost
	Manufacturning overheads		14200	900	U	13300	0		13300
	Selling and administrative		10500	300	U	10200	0		10200
	Net operating income		6200	5400	U	11600	900	U	12500
	Units	3890	4290
	Sales revenue	58350	64350
Less	Variable expense
	Manufacturning overheads	15560	17160
	Selling and administrative	7780	8580
	Contribution margin	35010	38610
Less	Fixed cost
	Manufacturning overheads	13300	13300
	Selling and administrative	10200	10200
	Net operating income	11510	15110