The computation of operating income for Frisco Company for 2013 follows: Sales $1,800,000 Cost of Goods...

The computation of operating income for Frisco Company for 2013 follows:
Sales		$1,800,000
Cost of Goods manufactured and sold:
Direct mateirals	$360,000
Direct Labor	240,000
Variable manufacturing Overhead	120,000
Fixed manufacturing overhead	240,000	960,000
Gross Margin		$840,000
Selling Expenses:
Variable	132,000
Fixed	168,000	300,000
		$540,000
Administrative Exepenses:
Variable	$156,000
Fixed	192,000	348,000
Net Operating income		$192,000

An operating budget is prepared for 2014 with sales forecasted at a 25% increase in volume.
Direct materials, direct labor and all costs labeled as variable are completely variable.
Fixed costs are expected to continue except for a $24,000 increase in fixed administrative costs. Actual operating data for 2014 are:
Sales	$2,160,000
Direct Material	444,000
Direct Labor	288,000
Variable manufacturing overhead	148,800
Fixed manufacturing overhead	246,000
Variable sellling exoenses	186,000
Fixed selling expenses	157,200
Variable administrative expenses	198,000
Fixed Administrative expenses.	218,200

a) Prepare a budget reprot comparing the 2014 planned operating budget with actual 2014 data
b) Prepare a budget report that would be useful in appraising the performance of the various persons charged with responsibility to provide satisfactory income.
Hint: Prepare budget data on a flexible basis and use the percentage by which sales wew actually experiences.
c) Comment on the differences revealed by the two reports.

Expert Solution

ANSWERS

(a.) The Budget report

	Planned Operating budget	Actual data	Variance
Sales	$1800000	$2160000	$360000 F
Cost of goods manufactured and sold:
Direct materials	$360000	444000	84000 U
Direct labour	240000	288000	48000 U
Variable manufacturing overhead	120000	148800	28800 U
Fixed manufacturing overhead	240000	246000	6000 U
Gross margin	840000	1033200	193200 F
Selling expenses:
Variable	132000	186000	54000 U
Fixed	168000	157200	10800 F
	540000	690000	150000 F
Administrative expenses:
Variable	156000	198000	42000 U
Fixed	192000	218200	26200 U
Net Operating Income	192000	273800	81800 F

(b). The Budget report

	Standard data	Actual data	Variance
Sales	$2250000	$2160000	$90000 U
Cost of goods manufactured and sold:
The Direct materials	$450000	444000	6000 F
The Direct labour	300000	288000	12000 F
The Variable manufacturing overhead	150000	148800	1200 F
The Fixed manufacturing overhead	240000	246000	6000 U
The Gross margin	1110000	1033200	76800 U
The Selling expenses:
Variable	165000	186000	21000 U
Fixed	168000	157200	10800 F
	777000	690000	87000 U
Administrative expenses:
Variable	195000	198000	3000 U
Fixed	216000	218200	2200 U
Net Operating Income	366000	273800	92200 U

(c)

This report prepared under option a. revealed the difference between the planned production/sales output and actual data. This report prepared under option b. revealed the difference between the standard results for actual production/sales output and actual data. The second report is a realistic comparison.

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