John Richardson is the manufacturing production supervisor for Torsion Tool Works (TTW), a company that manufactures hand tools for mechanics. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife, "This is the dumbest place I've ever worked. Last year the company set up this budget assuming it would sell 250,000 units. Well, it sold only 240,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 250,000 units goal and it sells 260,000. The company's making all kinds of money. You'd think I'd get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if I'd stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I've ever worked." TTW's master budget and the actual results for the most recent year of operating activity follow. Number of units Sales revenue Variable manufacturing costs Materials Labor Overhead Variable selling, general, and admin. costs Contribution margin Fixed costs Manufacturing overhead Selling, general, and admin. costs Net income Master Budget 250,000 $3,750,000 (600,000) (312,500) (337,500) (475,000) 2,025,000 (1,275,000) (470,000) $ 280,000 Actual Results Variances 10,000 $200,000 260,000 $3,950,000 (622,200) (321,000) (354,700) (501,300) 2,150,800 (1,273,100) (479,300) $398,400 22,200 8,500 17,200 26,300 125,800 1,900 9,300 $118,400 For U F U כ כ כ כ F FUF

FINANCIAL ACCOUNTING

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ISBN:9781259964947

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Chapter1: Financial Statements And Business Decisions

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Prepare a flexible budget and recompute the budget variances. Explain what might have caused the fixed costs to be different from the amount budgeted.

ANALYZE, THINK, COMMUNICATE
ATC 8-1 Business Applications Case Static versus flexible budget variances
John Richardson is the manufacturing production supervisor for Torsion Tool Works (TTW), a company that manufactures
hand tools for mechanics. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife,
"This is the dumbest place I've ever worked. Last year the company set up this budget assuming it would sell 250,000 units.
Well, it sold only 240,000. The company lost money and gave me a bonus for not using as much materials and labor as was
called for in the budget. This year, the company has the same 250,000 units goal and it sells 260,000. The company's
making all kinds of money. You'd think I'd get this big fat bonus. Instead, management tells me I used more materials and
labor than was budgeted. They said the company would have made a lot more money if I'd stayed within my budget. I guess
I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I've ever worked."
TTW's master budget and the actual results for the most recent year of operating activity follow.
Number of units
Sales revenue
Variable manufacturing costs
Materials
Labor
Overhead
Variable selling, general, and admin. costs
Contribution margin
Fixed costs
Manufacturing overhead
Selling, general, and admin. costs
Net income
Master Budget
250,000
$3,750,000
(600,000)
(312,500)
(337,500)
(475,000)
2,025,000
(1,275,000)
(470,000)
$ 280,000
Actual Results
260,000
$3,950,000
(622,200)
(321,000)
(354,700)
(501,300)
2,150,800
(1,273,100)
(479,300)
$ 398,400
Variances
10,000
$200,000
22,200
8,500
17,200
26,300
125,800
1,900
9,300
$118,400
For U
F
כ
כ
כ
כ
F
FUF

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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