Question

Osage, Inc., manufactures and sells lamps. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month: Actual (based on actual orders for 450,000 units) Master Budget (based on budgeted orders for 480,000 units) Sales revenue $ 4,968,000 $ 4,800,000 Less Variable costs Materials 1,440,000 1,440,000 Direct labor 276,000 336,000 Variable overhead 674,400 624,000 Variable marketing and administrative 468,000 480,000 Total variable costs $ 2,858,400 $ 2,880,000 Contribution margin $ 2,109,600 $ 1,920,000 Less Fixed costs Manufacturing overhead 988,800 960,000 Marketing 288,000 288,000 Administrative 204,000 180,000 Total fixed costs $ 1,480,800 $ 1,428,000 Operating profits $ 628,800 $ 492,000 Required: Prepare a profit variance analysis for Osage, Inc. (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Answer 1

Ans.	Profit Variance Analysis of OSAGE INC.
			Manufacturing	Market. & adm.	Sales price		Sales Activity variance
		Actual results	variance	variance	Variance	Flexible budget			Master Budget
	Sales revenue	4968000			468000 F	4500000	300000	U	4800000
	Variable costs:
	Material	1440000	90000 U			1350000	90000	F	1440000
	Direct labor	276000	39000 F			315000	21000	F	336000
	Variable overhead	674400	89400 U			585000	39000	F	624000
	Variable marketing and administrative	468000		18000 U		450000	30000	F	480000
	Total Variable Costs	2858400	140400 U	18000 U		2700000	180000	F	2880000
	Contribution margin	2109600	140400 U	18000 U	468000 F	1800000	120000	U	1920000
	Fixed costs:
	Manufacturing overhead	988800	28800 U			960000	0	no effect	960000
	Marketing	288000		0		288000	0	no effect	288000
	Administrative	204000		24000 U		180000	0	no effect	180000
	Total Fixed Costs	1480800	28800 U	24000 U		1428000	0	no effect	1428000
	Operating Profits	628800	169200 U	42000 U	468000 F	372000	120000	U	492000
	*Calculation:
			Flexible budget
	Units		450000
	Sales revenue		4800000/480000*450000
	Variable costs:
	Material		1440000/480000*450000
	Direct labor		336000/480000*450000
	Variable overhead		624000/480000*450000
	Variable marketing and administrative		480000/480000*450000
	*Flexible budget is prepared on the basis of actual unit sales.
	Sales price variance = Actual results - flexible budget.
	Manufacturing variance = Actual Manufacturing cost - Flexible manufacturing costs
	Market. & Administration variance = Actual marketing & adm. exp. - Flexible marketing & admin. Exp.
	Sales Activity variance = Flexible budget - Planning budget.
	*Increase in sales, contribution & profit = Favorable.
	*Decrease in sales, contribution & profit = Unfavorable.
	*Increase in variable & fixed cost = Unfavorable.
	*Decrease in variable & fixed cost = Favorable.