Question

Ellis Animal Health, Inc., produces a generic medication used to treat cats with feline diabetes. The liquid medication is sold in 100 ml vials. Ellis employs a team of sales representatives who are paid varying amounts of commission. Given the narrow margins in the generic veterinary drugs industry, Ellis relies on tight standards and cost controls to manage its operations. Ellis has the following budgeted standards for the month of April 2017:

Average selling price per vial $ 8.30

Total direct materials cost per vial $ 3.60

Direct manufacturing labor cost per hour $ 15.00

Average labor productivity rate (vials per hour) 100

Sales commission cost per vial $ 0.72

Fixed administrative and manufacturing overhead $990,000

Ellis budgeted sales of 700,000 vials for April. At the end of the month, the controller revealed that actual results for April had deviated from the budget in several ways:



Unit sales and production were 90% of plan.

Actual average selling price decreased to $8.20.

Productivity dropped to 90 vials per hour.

Actual direct manufacturing labor cost was $15.20 per hour.

Actual total direct material cost per unit increased to $3.90.

Actual sales commissions were $0.70 per vial.

Fixed overhead costs were $110,000 above budget.

Calculate the following amounts for Ellis for April 2017:

Required

1. Flexible budgets for 600,000 700,000 and 800,000 units

2. Static-budget and actual operating income

3. Static-budget variance for operating income

4. Flexible-budget operating income

5. Flexible-budget variance for operating income

6. Sales-volume variance for operating income

7. Price and efficiency variances for direct manufacturing labor

8. Flexible-budget variance for direct manufacturing labor

Answer 1

1
Particulars			Units
			600000	700000	800000
Revenue	A	8.3	4980000	5810000	6640000
Variable Costs:
Direct Material		3.6	2160000	2520000	2880000
Direct Labor		15	90000	105000	120000
Direct Commission		0.72	432000	504000	576000
Total Variable Costs	B		2682000	3129000	3576000
Contribution Margin	A-B		2298000	2681000	3064000
Less: Fixed OH			990000	990000	990000
Net Operating Income			1308000	1691000	2074000

2
	Actual	Static
Particulars	630000	700000
Sales	5166000	5810000
Variable Costs:
Direct Material	2457000	2520000
Direct Labor	106400	105000
Direct Commission	441000	504000
Total Variable Costs	3004400	3129000
Contribution Margin	2161600	2681000
Less: Fixed OH	1100000	990000
Net Operating Income	1061600	1691000

3
Static-budget variance for operating income
Static-budget variance	Actual Operating Income - Static Budget Operating Income
			= 1061600-1691000
	-629400
Static-budget variance for operating income is 629,400 U

4
	Actual
Particulars	630000
Sales	5229000
Variable Costs:
Direct Material	2268000
Direct Labor	94500
Direct Commission	453600
Total Variable Costs	2816100
Contribution Margin	2412900
Less: Fixed OH	990000
Net Operating Income	1422900