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 452,000 units) Master Budget (based on budgeted orders for 484,000 units)

Sales revenue $ 4,970,000 $ 4,840,000

Less Variable costs Materials 1,450,000 1,452,000

Direct labor 278,000 338,800

Variable overhead 674,600 629,200

Variable marketing and administrative 472,000 484,000

Total variable costs $ 2,874,600 $ 2,904,000

Contribution margin $ 2,095,400 $ 1,936,000

Less Fixed costs Manufacturing overhead 989,200 960,200

Marketing 290,000 290,000

Administrative 206,000 180,200

Total fixed costs $ 1,485,200 $ 1,430,400

Operating profits $ 610,200 $ 505,600

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.	OSAGE INC.
	Profit Variance Analysis
		Actual	Manufacturing	Marketing and	Sales price	Flexible	Sales activity	Master
			variances	Administrative variances	variance	Budget	variance		Budget
	Sales revenue	4970000			450000 F	4520000	320000	U	4840000
	Variable costs:
	Materials	1450000	94000 U			1356000	96000	F	1452000
	Direct labor	278000	38400 F			316400	22400	F	338800
	Variable overhead	674600	87000 U			587600	41600	F	629200
	Variable marketing & administrative	472000		20000   U		452000	32000	F	484000
	Total variable costs	2874600	142600 U	20000   U		2712000	192000	F	2904000
	Contribution margin	2095400	142600 U	20000   U	450000 F	1808000	128000	U	1936000
	Fixed costs:
	Manufacturing overhead	989200	29000 U			960200	0	none	960200
	Marketing	290000		0 none		290000	0	none	290000
	Administrative	206000		25800 U		180200	0	none	180200
	Total fixed costs	1485200	29000 U	25800 U		1430400	0	none	1430400
	Operating profits	610200	171600 U	45800 U	450000 F	377600	128000	U	505600
	*Calculation of flexible budget:
	Sales revenue	4840000/484000*452000
	Variable costs:
	Materials	1452000/484000*452000
	Direct labor	338800/484000*452000
	Variable overhead	629200/484000*452000
	Variable marketing & administrative	484000/484000*452000
	*Fixed costs in flexible budget remain same as master budget.
	*Manufacturing variance = Actual manufacturing overheads - Flexible overheads
	*Marketing and administrative variance = Actual marketing - Flexible marketing.
	*Sales price variance = Actual sales - Flexible sales
	*Sales activity variance = Flexible budget - Master budget.
	*Increase in Revenue and income from Master budget to flexible budget and Flexible budget to actual results is Favorable.
	*Decrease in Revenue and income from Master budget to flexible budget and Flexible budget to actual results is Unfavorable.
	*Increase in costs from Master budget to flexible budget and Flexible budget to actual results is Unfavorable.
	*Decrease in costs from Master budget to flexible budget and Flexible budget to actual results is Favorable.