a. Prepare a flexible budget and compute the sales and variable cost volume variances based on a comparison between the master budget and the flexible budget. b. Compute flexible budget variances by comparing the flexible budget with the actual results.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The Franklin Management Association held its annual public relations luncheon in April Year 2. Based on the previous year’s results, the organization allocated $24,818 of its operating budget to cover the cost of the luncheon. To ensure that costs would be appropriately controlled, Molly Hubbard, the treasurer, prepared the following budget for the Year 2 luncheon.
The budget for the luncheon was based on the following expectations:
- The meal cost per person was expected to be $12.50. The cost driver for meals was attendance, which was expected to be 1,470 individuals.
- Postage was based on $0.58 per invitation and 3,350 invitations were expected to be mailed. The cost driver for postage was number of invitations mailed.
- The facility charge is $1,700 for a room that will accommodate up to 1,600 people; the charge for one to hold more than 1,600 people is $2,200.
- A fixed amount was designated for printing, decorations, the speaker’s gift, and publicity.
| FRANKLIN MANAGEMENT ASSOCIATION | |||
| Public Relations Luncheon Budget | |||
| April Year 2 | |||
| Operating funds allocated | $ | 24,818 | |
| Expenses | |||
| Variable costs | |||
| Meals (1,470 × $12.50) | 18,375 | ||
| Postage (3,350 × 0.58) | 1,943 | ||
| Fixed costs | |||
| Facility | 1,700 | ||
| Printing | 1,020 | ||
| Decorations | 910 | ||
| Speaker's gift | 200 | ||
| Publicity | 670 | ||
| Total expenses | 24,818 | ||
| Budget surplus (deficit) | $ | 0 | |
Actual results for the luncheon follow.
| FRANKLIN MANAGEMENT ASSOCIATION | |||
| Actual Results for Public Relations Luncheon | |||
| April Year 2 | |||
| Operating funds allocated | $ | 24,818 | |
| Expenses | |||
| Variable costs | |||
| Meals (1,690 × $13.20) | 22,308 | ||
| Postage (4,350 × 0.58) | 2,523 | ||
| Fixed costs | |||
| Facility | 2,200 | ||
| Printing | 1,020 | ||
| Decorations | 910 | ||
| Speaker's gift | 200 | ||
| Publicity | 670 | ||
| Total expenses | 29,831 | ||
| Budget deficit | $ | (5,013 | ) |
Reasons for the differences between the budgeted and actual data follow.
- The president of the organization, Rodney Snow, increased the invitation list to include 1,000 former members. As a result, 4,350 invitations were mailed.
- Attendance was 1,690 individuals. Because of higher-than-expected attendance, the luncheon was moved to a larger room, thereby increasing the facility charge to$2,200
- At the last minute, Ms. Hubbard decided to add a dessert to the menu, which increased the meal cost to $13.2 per person.
- Printing, decorations, the speaker’s gift, and publicity costs were as budgeted.
Required:
a. Prepare a flexible budget and compute the sales and variable cost volume variances based on a comparison between the
b. Compute flexible
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