Question

As the new accountant for Cohen & Co., you have been asked to provide a succinct analysis of financial performance for the year just ended. You obtain the following information that pertains to the company’s sole product:

	Actual			Master (Static) Budget
Units sold		35,000			40,000
Sales	$	384,000		$	470,000
Variable costs		214,000			278,000
Fixed costs		137,000			135,000

Required:

1. What was the actual operating income for the period?

2. What was the company’s master (static) budget operating income for the period?

3. (a) What was the total master (static) budget variance, in terms of operating income, for the period? (b) Is this variance favorable (F) or unfavorable (U)? (Note: The total master (static) budget variance is also referred to as the total operating income variance for the period.) (If a variance has no amount, select "None" in the corresponding dropdown cell.)

4. The total master (static) budget variance for a period can be decomposed into a total flexible-budget variance and a sales volume variance. (a) What was the total flexible-budget variance for the period? (b) Was this variance favorable (F) or unfavorable (U)? (c) What was the sales volume variance for the period? (d) Was this variance favorable (F) or unfavorable (U)? (Do not round your intermediate calculations. If a variance has no amount, select "None" in the corresponding dropdown cell.)

Answer 1

1. Actual operating income for the period is $33,000:

Actual
Units sold	35,000
Sales	384,000
Variable costs	214,000
Contribution Margin	170,000
Fixed costs	137,000
Operating Income	33,000

2. Company’s master (static) budget operating income for the period is $57,000:

Master (Static) Budget
Units sold	40,000
Sales	470,000
Variable costs	278,000
Contribution Margin	192,000
Fixed costs	135,000
Operating Income	57,000

3. Total master static budget variance is $24,000

Actual		Master (Static) Budget	Master (static) budget variance
Units sold	35,000	40,000
Sales	384,000	470,000
Variable costs	214,000	278,000
Contribution Margin	170,000	192,000
Fixed costs	137,000	135,000
Operating Income	33,000	57,000	24,000	Unfavourable

4.

	Actual	Master (Static) Budget	Master (static) budget variance		Flexible Budget	Flexible Budget Variance		Sales Volume variance
	A	B	A-B		C	C-A		B-C
Units sold	35,000	40,000			35,000	0		40,000
Sales	384,000	470,000			411250	27,250	U	58,750	U
Variable costs	214,000	278,000			243250	29,250	F	34,750	F
Contribution Margin	170,000	192,000			168000	-2,000	F	24,000	U
Fixed costs	137,000	135,000			135,000	-2,000	U	0	None
Operating Income	33,000	57,000	24,000	Unfavourable	33,000	0	None	24,000	U