Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month.
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.
Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has been experiencing problems as shown by its June contribution format income statement below:
| Flexible Budget | Actual | ||||||
| Sales (6,000 pools) | $ | 225,000 | $ | 225,000 | |||
| Variable expenses: | |||||||
| Variable cost of goods sold* | 73,620 | 88,700 | |||||
| Variable selling expenses |
17,000 |
17,000 | |||||
| Total variable expenses |
90,620 |
105,700 | |||||
| Contribution margin |
134,380 |
119,300 | |||||
| Fixed expenses: | |||||||
| Manufacturing |
53,000 | 53,000 | |||||
| Selling and administrative | 68,000 | 68,000 | |||||
| Total fixed expenses |
121,000 |
121,000 | |||||
| Net operating income (loss) | $ | 13,380 | $ |
(1,700 |
) | ||
*Contains direct materials, direct labor, and variable manufacturing overhead.
Janet Dunn, who has just been appointed general manager of the Westwood Plant, has been given instructions to “get things under control.” Upon reviewing the plant’s income statement, Ms. Dunn has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following standard cost per swimming pool:
| Standard Quantity or Hours | Standard Price or Rate |
Standard Cost | ||||
| Direct materials | 3.3 pounds | $ |
2.30 |
per pound | $ | 7.59 |
| Direct labor | 0.6 hours | $ |
6.30 |
per hour | 3.78 | |
| Variable manufacturing overhead | 0.5 hours* | $ |
1.80 |
per hour |
0.90 |
|
| Total standard cost per unit | $ | 12.27 | ||||
*Based on machine-hours.
During June, the plant produced 6,000 pools and incurred the following costs:
- Purchased 24,800 pounds of materials at a cost of $2.75 per pound.
-
Used 19,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
-
Worked 4,200 direct labor-hours at a cost of $6.00 per hour.
-
Incurred variable
manufacturing overhead cost totaling $7,260 for the month. A total of 3,300 machine-hours was recorded.
It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
Required:
2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month.
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