Question

The Green Ltd produces personalized T-shirts. Each shirt is designed for an individual customer and is ordered over the internet. The company’s operating budget for February included these data: Number of shirts 15 000 Selling price per shirt $20 Variable cost per shirt $8 Fixed costs for the month $145 000 The actual results for September were: Number of shirts produced and sold 12 000 Average selling price per shirt $21 Variable cost per shirt $7 Fixed costs for the month $150 000 The CEO of the company observed that the operating profit for September was much lower than anticipated, despite a higher than budgeted selling price and a lower than budgeted variable cost per unit. As the company’s management accountant, you have been asked to provide explanations for the disappointing September results. Management develops its flexible budget on the basis of budgeted per-output-unit revenue and per output-unit variable costs without detailed analysis of budgeted inputs. 1. Prepare a static-budget-based variance analysis of the September performance. 2. Prepare a flexible-budget-based variance analysis of the September performance. 3. Why might management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis? Explain your answer.

Answer 1

Flexible Budget
	Budget		Actual		Flexible Budget		Variance	Result
	Unit/Price	Total	Unit /Price	Total	Unit /Price	Total
No. of Shirts		$15,000		$12,000		$12,000
Selling Price ( Per Unit)	$20	$300,000	$21	$252,000	$20	$240,000	$12,000	F
Variable Cost	$8	$120,000	$7	$84,000	$8	$96,000	$12,000	F
Fixed Cost		$145,000		$150,000		$145,000	-$5,000	UF
Total Cost		$265,000		$234,000		$241,000	$7,000	F
Operating Profit		$35,000		$18,000		-$1,000	-$19,000	UF

Static Budget
	Busdget	Actual	Variance	Result
No. of Shirts	$15,000	$12,000
Selling Price ( Per Unit)	$300,000	$240,000	$60,000	F
Variable Cost	$120,000	$96,000	-$24,000	F
Fixed Cost	$145,000	$150,000	$5,000	UF
Total Cost	$265,000	$246,000	-$19,000	F
Operating Profit	$35,000	-$6,000	-$41,000	UF

3)In static budget the no of units budgeted and actual units produced if differ, the selling and cost price comparison will not be matched hence it's required to convert the static to flexible budget then compare it with actuals which gives correct picture