Chapter 14, Problem 24E

1.

To determine

Calculate the actual operating income for the period.

Explanation of Solution

Calculate the actual operating income for the period.

$\begin{array}{c}\text{Actual}\text{operating}\text{income}\text{=}\left(\begin{array}{l}\text{Actual}\text{sales}\text{revenue}-\\ \text{Actual}\text{variable}\text{costs}-\\ \text{Actual}\text{fixed}\text{costs}\end{array}\right)\\ \text{=}\left(\begin{array}{l}\text{\$380,000}-\\ \text{\$210,000}-\\ \text{\$145,000}\end{array}\right)\\ \text{=\$25,000}\end{array}$

2.

To determine

Calculate the company’s master (static) budget operating income for the period.

Explanation of Solution

Calculate the company’s master (static) budget operating income for the period.

$\begin{array}{c}\begin{array}{l}\text{Master}\text{(}\text{static)}\text{budget}\\ \text{operating}\text{income}\end{array}\}\text{=}\left(\begin{array}{l}\text{Budgeted}\text{sales}-\text{Budgeted}\text{variable}\text{costs}\\ -\text{Budgeted}\text{fixed}\text{costs}\end{array}\right)\\ \text{=}\text{\$450,000}-\text{\$270,000}-\text{\$135,000}\\ \text{=\$45,000}\end{array}$

3 (a) & 3 (b)

To determine

Calculate the total master (static) budget variance, in terms of operating income and identify whether the variance is favorable (F) or unfavorable (U).

Explanation of Solution

Calculate the company’s master (static) budget operating income for the period:

$\begin{array}{c}\text{Total}\text{master}\text{(static)}\text{budget}\text{variance}\text{=}\left(\begin{array}{l}\text{Actual}\text{operating}\text{income}-\\ \text{Master}\text{budget}\text{operating}\text{income}\end{array}\right)\\ \text{=}\text{\$25,000}-\text{\$45,000}\\ \text{=\$20,000U}\end{array}$

Thus, the variance is unfavorable.

4 (a) and 4 (b).

To determine

Calculate the total flexible budget variance for the period and identify whether the variance is favorable or unfavorable.

Explanation of Solution

The first-level decomposition of the total master (static) budget variance in operating income is attained through the implementation of a flexible-budget (depending on actual sales volume for the period). In this situation, the flexible-budget operating income $\text{= \$400,000}-\text{\$240,000}-\text{\$135,000 = \$25,000}$ .

Calculate total flexible budget variance:

$\begin{array}{c}\text{Total flexible budget variance}\text{=}\left(\begin{array}{l}\text{Actual}\text{operating}\text{income}-\\ \text{Fexible}\text{budget}\text{operating}\text{income}\end{array}\right)\\ \text{=}\text{\$25,000}-\text{\$25,000}\\ \text{=\$0}\end{array}$

Note 1: $\$400,000=\frac{\$450,000}{45,000}\times 40,000$

Note 2: $\$240,000=\frac{\$270,000}{45,000}\times 40,000$

4 (c) and 4 (d).

To determine

Calculate the sales volume variance and identify whether the variance is favorable or unfavorable.

Explanation of Solution

Calculate the sales volume variance and identify whether the variance is favorable or unfavorable.

$\begin{array}{c}\text{Sales}\text{volume}\text{variance=}\left(\begin{array}{l}\text{Flexible-budget}\text{operating}\text{income}-\\ \text{Master}\text{budget}\text{operating}\text{income}\end{array}\right)\\ \text{=}\text{\$25,000}-\text{\$45,000}\\ \text{=\$20,000U}\end{array}$

Conclusion:

	Actual Results	Flexible Budget	Master budget
Unit sales	40,000	40,000	45,000
Sales	$380,000	$400,000	$450,000
Total variable expenses	210,000	240,000	270,000
Contribution margin	$170,000	$160,000	$180,000
Fixed expenses	145,000	135,000	135,000
Operating income	$25,000	$25,000	$45,000

Table (1)

Calculate total master (static) budget variance:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{Master}\text{(Static)}\\ \text{Budget}\text{variance}\end{array}\}\text{=}\text{Master}\text{budget}\text{operating}\text{income}-\text{Actual}\text{operating}\text{income}\\ \text{=}\text{\$45,000}-\text{\$25,000}\\ \text{=\$20,000U}\end{array}$

Calculate flexible-budget variance:

$\begin{array}{c}\text{Flexible}\text{budget}\text{variance}\text{=}\text{Actual}\text{results}-\text{Flexible}\text{budget}\\ \text{=}\text{\$25,000}-\text{\$25,000}\\ \text{=\$0}\end{array}$

Calculate sales volume variance:

$\begin{array}{c}\text{Sales}\text{volume}\text{variance}\text{=}\left(\begin{array}{l}\text{Master}\text{budget}\text{operating}\text{income}-\\ \text{Flexible}\text{budget}\text{operating}\text{income}\end{array}\right)\\ \text{=}\text{\$45,000}-\text{\$25,000}\\ \text{=\$20,000}\end{array}$

5.

To determine

Explanation of Solution

• The sales volume variance indicates the effect on operating profit of selling a different volume of sales associated to the budgeted volume reflected in the master budget. Likewise, the computation of the variance holds three other elements constant: “selling price per unit, variable cost per unit, and total fixed costs”.
• It is to be noted that this variance could be explained with respect to contribution margin, in this context, the computation looks at the effect on contribution margin of selling an amount different from the sales volume shown in the master budget for the period.
• The total flexible-budget variance indicates the composite impact on operating income of changes in three components: “selling price per unit, variable cost per unit, and total fixed costs:
• Therefore, in computing the flexible-budget variance we “hold constant” sales volume. There is a zero flexible-budget variance, in this context.
• Conversely, this does not indicate that there is “no variable cost flexible budget variance, no selling price variance or no fixed cost spending variance”. It just means that these three variances net to zero.