Question

Resultes of operations for Alpha company for the month ending 10/31/2015 are presented below:

                                             Actual                   Budget

Sales                                  250,000                300,000

Cost Goods sold                 185,000                180,000

Selling Expenses                20,000                  22,000

Administrative Expenses    10,000                  11,000

Pre Tax Profit                         ?                           ?

A. Compute pre tax profit for actual and budget

B. Compute variances from budget

C. What items should get the most attention?

Answer 1

A) Calculation of pretax profit (Amount in $)

Particulars	Actual	Budget
Sales	250,000	300,000
Less: Cost of goods sold	(185,000)	(180,000)
Gross Profit	65,000	120,000
Less: Selling Expenses	(20,000)	(22,000)
Less: Administrative Expenses	(10,000)	(11,000)
Pretax Profit	35,000	87,000

B) Sales Variance = Actual Sales - Budgeted Sales

= $250,000 - $300,000 = $50,000 Unfavorable

Cost of goods sold variance = Budgeted cost - Actual cost

= $180,000 - $185,000 = $5,000 Unfavorable

Selling Expenses Variance = Budgeted expenses - Actual expenses

= $22,000 - $20,000 = $2,000 Favorable

Administrative Expenses Variance = Budgeted expenses - Actual expenses

= $11,000 - $10,000 = $1,000 Favorable

Total variance in pretax profit = Budgeted Pretax profit - Actual Pretax Profit

= $87,000 - $35,000 = $52,000 Unfavorable

C) Sales and cost of goods sold should get the most attention. On the basis of units sold all other components of income statement are calculated. The cost of goods sold, selling expenses are also based on units sold.The cost of goods sold include purchase cost and cost of opening inventory etc.