Question

Big Time Videos Inc. makes DVDs to sell to stores around the country. Top management meets on the first Tuesday of the month to evaluate the previous month’s performance. Prior to your arrival at the company the accounting department produced the following Static Budget Performance Report for the meeting.

The company had expected to sell 9,800 units but the actual results revealed that only 8,200 units were sold during the month. You notice right away that the actual sales price per unit was $21 and that was more that the budgeted sales price per unit. There were no changes in inventory levels.

You are the new financial consultant to the company, and you know that variable costs such as direct materials, direct labor, manufacturing overhead costs vary with the sales volume (units). Moreover, you know that fixed costs are expected to remain the same regardless of the sales volume but it is not likely that fixed costs can be estimated (budgeted) exactly so some differences can be expected.

At the beginning of the meeting the CEO of company blurts out “Operating Income so low…only $9,700”….then pointing to the favorable variable cost variances…..how in the world can there be so many favorable variances in the Static Budget Performance Report?” There is silence. More silence….then you hear it (you knew this was coming). “As our new financial consultant, what are your thoughts on the subject?”

Your reply….”Thank you for asking, the Static Budget Performance Report does not explain how much of the variances are a result of the difference in the sales PRICE per unit and COSTS per unit, nor does it explain how much of the variances are a result of the difference in the number of UNITS sold. To help explain the variances I will prepare a Flexible Budget Performance Report.

Big Time Videos Inc.
Static Budget Performance Report
For the Month Ended January 31, 2018
	Actual	Static
Budget Amt.	Results	Budget	Variance	F or U
Units                          per Unit	8,200	9,800	1,600	U
Sales Revenue           $20.00	$ 172,200	$ 196,000	$23,800	U
Variable Costs-Manufacturing
Direct Materials $10.00	77,500	98,000	20,500	F
Direct Labor        $ 1.10	7,700	10,780	3,080	F
Overhead             $   .55	4,300	5,390	1,090	F
Total Variable Costs	89,500	114,170	24,670	F
Contribution Margin	82,700	81,830	870	F
Fixed Costs:
Manufacturing - Salaries	31,100	30,050	1,050	U
Manufacturing -Depreciation	20,900	21,400	500	F
Selling Costs - Salaries	12,900	10,825	2,075	U
Selling Costs - Advertising	8,100	6,850	1,250	U
Total Fixed Costs	73,000	69,125	3,875	U
Operating Income	9,700	12,705	3,005	U

Your Plan:

1. Prepare a report that provides more information (prepare a flexible budget performance report for the
   actual number of units sold)…so you will need to complete the Flexible Budget column based on your
    knowledge of the behavior of variable cost and fixed cost. Then identify the variance caused by
    Price/Cost and the variance caused by the difference in the number of units sold. Complete your work
    using this Word document. After completing Flexible Budget Performance Report answer questions 2
    thru 7 below in the response space provided.

Big Time Videos Inc.
Flexible Budget Performance Report
For the Month Ended January 31, 2018
	Actual		F or U	Flexible		F       or U	Static
.	Results	Var. (caused by Price/Cost)		Budget (expected results for 9,800 units)	Var. (caused by number of units sold)		Budget (expected results for 9,800 units)
Units	8,200			8,200	1,600		9,800
Sales Revenue	$ 172,200	$		$	$		$196,000
Variable Costs-Manufacturing
Direct Materials	77,500						98,000
Direct Labor	7,700						10,780
Overhead	4,300						5,390
Total Variable Costs	89,500						114,170
Contribution Margin	82,700						81,830
Fixed Costs:
Manufacturing - Salaries	31,100						30,050
Manufacturing -Depreciation	20,900						21,400
Selling Costs - Salaries	12,900						10,825
Selling Costs - Advertising	8,100						6,850
Total Fixed Costs	73,000						69,125
Operating Income (loss)	9,700	10,355	F	(655)	13,360	U	12,705

Check number

2. Identify the amount of Flexible Budget Variance, Sales Volume Variance and Static Budget Variance.
    Discuss the meaning/relevance of each.
    Response:

3. Answer the CEO’s question about the low operating income of $9,700….yet there are so many
    Favorable variances, including the Favorable Operating Income Variance of $10,355. How can that be?

    Response:

4. Which of the variances in the performance report should be investigated and why? What are the
   possible explanations for each variance (we don't have all of the underlying information but will want
    to discuss some of the possible reasons for Sales Revenue and Costs being higher or lower than
    expected (no exact perfect answer...just think logically about what may have happened).

    Response:

5. Based on your analysis, how would you rate the company’s performance? Why?
    Response:

6. To help explain what happened, provide a brief description of the information that the report provides
    including the basic difference between variable and fixed costs.
    Response:

7. You want to impress the CEO, so you want to go above and beyond what you were asked to do.
    Calculate the breakeven point in Sales Revenue in Dollars and Units and calculate the Sales Revenue in
    Dollars and Units that would be required for the company to make $20,000 (target profit). (chapter 20)
    Response:

   

Answer 1

Big Time Videos Inc.

Flexible Budget Performance Report

For the month ended January 31, 2018

	Actual Results	Revenue and Spending Variances	Flexible Budget	Volume / Activity Variances	Static Budget
Sales Units	8,200	None	8,200	1,600 U	9,800
Sales Revenue	$172,200	$ 8,200 F	$164,000	$ 32,000 U	$196,000
Variable Manufacturing Costs
Direct Materials	77,500	4,500 F	82,000	16,000 F	98,000
Direct Labor	7,700	1,320 F	9,020	1,760 F	10,780
Overhead	4,300	210 F	4,510	880 F	5,390
Total Variable Costs	89,500	6,030 F	95,530	18,640 F	114,170
Contribution Margin	82,700	14,230 F	68,470	13,360 U	81,830
Fixed Costs
Manufacturing Salaries	31,100	1,050 U	30,050	None	30,050
Manufacturing Depreciation	20,900	500 F	21,400	None	21,400
Selling Costs:Salaries	12,900	2,075 U	10,825	None	10,825
Selling Costs: Advertising	8,100	1,250 U	6,850	None	6,850
Total Fixed Costs	73,000	3,875 U	69,125	None	69,125
Operating Income ( loss)	9,700	10,355 F	(655)	13,360 U	12,705