Great Bubbles, Inc. produces multicolored bubble solution used for weddings and other events. The company sold 70,000 bubble kits during August, and its actual operating income was as follows: Data table: Great Bubbles, Inc. Income Statement Month Ended August 31 Sales revenue. . . . . . . . . . . . . . . . $214,500 Variable expenses: Cost of goods sold. . . . . $84,100 Sales commissions. . . . 19,000 Utility expense. . . . . . . . 10,500 Fixed expenses: Salary expense. . . . . . . 35,100 Depreciation expense. . . 18,000 Rent expense. . . . . . . . . 8,850 Utility expense. . . . . . . . 6,000 Total expenses. . . . . . . . . . . . . . . $181,550 Operating income. . . . . . . . . . . . . $32,950 The company's flexible budget income statement for August follows: Data table: Great Bubbles, Inc. Flexible Budget Income Statement Month Ended August 31 Flexible Budget per Output Unit Output Units (Kits) 65,000 70,000 75,000 Sales revenue $2.95 $191,750 $206,500 $221,250 Variable expenses: Cost of goods sold 1.20 78,000 84,000 90,000 Sales commissions 0.25 16,250 17,500 18,750 Utility expense 0.15 9,750 10,500 11,250 Fixed expenses: Salary expense 33,000 33,000 36,300 Depreciation expense 18,000 18,000 20,700 Rent expense 9,000 9,000 13,000 Utility expense 6,000 6,000 6,000 Total expenses $170,000 $178,000 $196,000 Operating income $21,750 $28,500 $25,250 Requirements: 1. Prepare an income statement performance report for August.Note: The master budget was based on expected sales volume of 65,000 bubble kits. 2. What accounts for most of the difference between actual operating income and master budget operating income? 3. What is Great Bubbles' master budget variance for operating income? Explain why the income statement performance report provides Great Bubbles' managers with more useful information than the simple master budget variance. What insights can Great Bubbles' managers draw from this performance report?

Great Bubbles, Inc. produces multicolored bubble solution used for weddings and other events. The company sold 70,000 bubble kits during August, and its actual operating income was as follows: Data table: Great Bubbles, Inc. Income Statement Month Ended August 31 Sales revenue. . . . . . . . . . . . . . . . $214,500 Variable expenses: Cost of goods sold. . . . . $84,100 Sales commissions. . . . 19,000 Utility expense. . . . . . . . 10,500 Fixed expenses: Salary expense. . . . . . . 35,100 Depreciation expense. . . 18,000 Rent expense. . . . . . . . . 8,850 Utility expense. . . . . . . . 6,000 Total expenses. . . . . . . . . . . . . . . $181,550 Operating income. . . . . . . . . . . . . $32,950 The company's flexible budget income statement for August follows: Data table: Great Bubbles, Inc. Flexible Budget Income Statement Month Ended August 31 Flexible Budget per Output Unit Output Units (Kits) 65,000 70,000 75,000 Sales revenue $2.95 $191,750 $206,500 $221,250 Variable expenses: Cost of goods sold 1.20 78,000 84,000 90,000 Sales commissions 0.25 16,250 17,500 18,750 Utility expense 0.15 9,750 10,500 11,250 Fixed expenses: Salary expense 33,000 33,000 36,300 Depreciation expense 18,000 18,000 20,700 Rent expense 9,000 9,000 13,000 Utility expense 6,000 6,000 6,000 Total expenses $170,000 $178,000 $196,000 Operating income $21,750 $28,500 $25,250 Requirements: 1. Prepare an income statement performance report for August.Note: The master budget was based on expected sales volume of 65,000 bubble kits. 2. What accounts for most of the difference between actual operating income and master budget operating income? 3. What is Great Bubbles' master budget variance for operating income? Explain why the income statement performance report provides Great Bubbles' managers with more useful information than the simple master budget variance. What insights can Great Bubbles' managers draw from this performance report?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Question

Great Bubbles, Inc. produces multicolored bubble solution used for weddings and other events. The company sold

70,000 bubble kits during August, and its actual operating income was as follows:

Data table:

Great Bubbles, Inc.
Income Statement
Month Ended August 31
Sales revenue. . . . . . . . . . . . . . . .	$214,500
Variable expenses:
Cost of goods sold. . . . .	$84,100
Sales commissions. . . .	19,000
Utility expense. . . . . . . .	10,500
Fixed expenses:
Salary expense. . . . . . .	35,100
Depreciation expense. . .	18,000
Rent expense. . . . . . . . .	8,850
Utility expense. . . . . . . .	6,000
Total expenses. . . . . . . . . . . . . . .	$181,550
Operating income. . . . . . . . . . . . .	$32,950

The company's flexible budget income statement for August follows:

Data table:

Great Bubbles, Inc.
Flexible Budget Income Statement
Month Ended August 31
		Flexible
		Budget
		per Output
		Unit	Output Units (Kits)
			65,000	70,000	75,000
	Sales revenue	$2.95	$191,750	$206,500	$221,250
	Variable expenses:
	Cost of goods sold	1.20	78,000	84,000	90,000
	Sales commissions	0.25	16,250	17,500	18,750
	Utility expense	0.15	9,750	10,500	11,250
	Fixed expenses:
	Salary expense		33,000	33,000	36,300
	Depreciation expense		18,000	18,000	20,700
	Rent expense		9,000	9,000	13,000
	Utility expense		6,000	6,000	6,000
	Total expenses		$170,000	$178,000	$196,000
	Operating income		$21,750	$28,500	$25,250

Requirements:

1.	Prepare an income statement performance report for August.Note: The master budget was based on expected sales volume of 65,000 bubble kits.
2.	What accounts for most of the difference between actual operating income and master budget operating income?
3.	What is Great Bubbles' master budget variance for operating income? Explain why the income statement performance report provides Great Bubbles' managers with more useful information than the simple master budget variance. What insights can Great Bubbles' managers draw from this performance report?

Definition Definition Measure used to estimate the difference between the budgeted and annual proportion for a specific accounting year. A favorable budget variance refers to positive variances or gains, while unfavorable or negative variances refer to a shortfall in the budget. A budget variance is indicative of the instances where the actual costs incurred are higher or lower than the estimated costs.

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