Question

Here is the data that Vroom-Vroom used for their budgets:					Here are the Actual Results in December and January:
Monthly Budget Data:					Actual Data:		December	January
Selling Price per uniit:	$            70.00	each			Production (Units)		375,000	150,000
Raw Materail Cost	$            30.00	each			Revenue		$        26,300,000	$        10,300,000
Packaging Costs	$            10.00	each			Raw Materials		$        11,348,500	$          4,485,000
Electricity	$               3.00	each			Packaging Materials		$          3,720,000	$          1,445,000
Waste and Other Costs	$               5.00	each			Electricity		$          1,125,000	$              460,000
Salary and Wages Costs	$        450,000	per month			Waste and Other Costs		$          1,888,000	$              750,000
Fringe Benefits	50%	of Salaries			Wages		$              500,000	$              450,000
Rent Costs	$        500,000	per month			Fringe Benefits		$              250,000	$              225,000
Insurance Costs	$          70,000	per month			Rent		$              500,000	$              500,000
Depreciation Costs	$        250,000	per month			Insurance		$                70,000	$                75,000
					Depreciation		$              250,000	$              240,000

Vroom-Vroom estimated sales/production will be between 100,000 and 300,000 cars per month. Their static budget is based on 200,000 cars sold per month. Assume that all units produced in a month are also sold in that month. Vroom-Vroom’s unit of production/sale is a car (unit/each).

Question 1: Prepare a static budget in Excel for Vroom-Vroom.

1. Show the static budget for December in Contribution Margin Income Statement format.
2. Compare December’s static budget to December’s actual results. Specify which line items are favorable or unfavorable and how much.
3. For Ingredient Costs and Packaging Costs, break out the Price and Volume Variances for December. Provide potential explanations for each one.
4. Show the static budget for January in Contribution Margin Income Statement format.
5. Compare January’s static budget to January’s actual results. Specify which line items are favorable or unfavorable and how much.
6. For Ingredient Costs and Packaging Costs, break out the Price and Volume Variances for January. Provide potential explanations for each one.

Answer 1

Static Budget for 2,00,000 units
No. of units per month	200000
	Per unit	Total
Selling price	$70	$14,000,000
Variable Costs:
Raw material cost	$30	$6,000,000
Packaging cost	$10	$2,000,000
Electricity	$3	$600,000
Waste and other costs	$5	$1,000,000
Total Variable Costs	$48	$9,600,000
Contribution Margin	$22	$4,400,000
Fixed Costs:
Salary and Wages		$450,000
Fringe benefits		$225,000
Rent Cost		$500,000
Insurance costs		$70,000
Depreciation costs		$250,000
Total fixed Costs		$1,495,000
Net income	$15	$2,905,000

	Static Budget		December			January
			December Actual	Favourable/Unfavourable	Difference (Actual - Budget)	January Actual	Favourable/Unfavourable	Difference (Actual - Budget)
No. of units per month	200000	200000	375,000	F	175,000	150,000	U	-50,000
	Per unit	Total
Selling price/Revenues	$70	$14,000,000	$26,300,000	F	$12,300,000	$10,300,000	U	-$3,700,000
Variable Costs:
Raw material cost	$30	$6,000,000	$11,348,500	U	$5,348,500	$4,485,000	F	-$1,515,000
Packaging cost	$10	$2,000,000	$3,720,000	U	$1,720,000	$1,445,000	F	-$555,000
Electricity	$3	$600,000	$1,125,000	U	$525,000	$460,000	F	-$140,000
Waste and other costs	$5	$1,000,000	$1,888,000	U	$888,000	$750,000	F	-$250,000
Total Variable Costs	$48	$9,600,000	$18,081,500	U	$8,481,500	$7,140,000	F	-$2,460,000
Contribution Margin	$22	$4,400,000	$8,218,500	F	$3,818,500	$3,160,000	U	-$1,240,000
Fixed Costs:
Salary and Wages		$450,000	$500,000	U	$50,000	$450,000	F	$0
Fringe benefits		$225,000	$250,000	U	$25,000	$225,000	F	$0
Rent Cost		$500,000	$500,000	F	$0	$500,000	F	$0
Insurance costs		$70,000	$70,000	F	$0	$75,000	U	$5,000
Depreciation costs		$250,000	$250,000	F	$0	$240,000	F	-$10,000
Total fixed Costs		$1,495,000	$1,570,000	U	$75,000	$1,490,000	F	-$5,000
Net income	$15	$2,905,000	$6,648,500	F	$3,743,500	$1,670,000	U	-$1,235,000

Particulars	Budget	December	January
Units	200,000	375,000	150,000
Raw material cost per unit	$30	$30.26	$29.90
Packaging cost per unit	$10	$9.92	$9.63
Raw material price variance ((AP-BP)*AQ))		$98,500	-$15,000
Packaging price variance((AP-BP)*AQ)		-$30,000	-$55,000
Raw material volume variance ((AQ-SQ)*SP))		5,250,000	-1,500,000
Packaging volume variance ((AQ-SQ)*SP)		1,750,000	-500,000

Price variance is calculated as (Actual Price - Budget Price) * Actual Quantity

Volume Variance is calculated as (Actual Quantity - Standard Quantity) * Standard Price

Raw material price variance is Unfavourable for December since actual price exceeds budgeted price by $98,500. It is Favourable for January since actual price is $15000 less than budgeted price. Packaging price variance is Favourable for December and January both since actual cost is lesser than budgeted cost by $30,000 and $55,000 respectively.

Raw material volume variance is Unfavourable for December since actual quantity volume exceeds budgeted quantity, however, it is favourable for January since actual is less than budgeted.Similar is the case for packaging volume variance.

If we look at the reasoning, we see that per unit raw material cost is out of budget in December while per unit packaging cost is within budget, which explains the price variances. The volume variances can be attributed to large increase in actual production in December over budgeted production. For January, both costs are within budget, hence, favourable price variances. Favourable volume variances are actually a negative since it is due to lower than budgeted production.