Chapter 14, Problem 25E

1.

To determine

Prepare a flexible budget for the production and sale of 950 units.

Explanation of Solution

Prepare a flexible budget for the production and sale of 950 units.

Figure (1)

2. a

To determine

Compute the sales volume variance, in terms of operating income and indicate whether this variance is favorable (F), or favorable (U).

Explanation of Solution

Compute the sales volume variance, in terms of operating income and indicate whether this variance is favorable (F), or favorable (U).

$\begin{array}{c}\begin{array}{l}\text{Sales}\text{volume}\text{variance}\\ \text{(in}\text{terms}\text{of}\text{operating}\text{income)}\end{array}\}\text{=}\left(\begin{array}{l}\text{Flexible}\text{budget}\text{operating}\text{income}-\\ \text{Master(static)}\text{budget}\text{operating}\text{income}\end{array}\right)\\ \text{=}\text{\$182,500}-\text{\$200,000}\\ \text{=\$17,500U}\end{array}$

2. b

To determine

Compute the sales volume variance, in terms of contribution margin and indicate whether this variance is favorable (F), or favorable (U).

Explanation of Solution

Compute the sales volume variance, in terms of contribution margin and indicate whether this variance is favorable (F), or favorable (U).

$\begin{array}{c}\begin{array}{l}\text{Sales}\text{volume}\text{variance}\\ \text{(}\text{in}\text{terms}\text{of}\text{contribution}\text{margin)}\end{array}\}\text{=}\left(\begin{array}{l}\text{Flexible-budget}\text{contribution}\text{margin}-\\ \text{Master}\text{(static)}\text{budget}\text{contribution}\text{margin}\end{array}\right)\\ \text{=}\text{\$332,500}-\text{\$350,000}\\ \text{=\$17,500U}\end{array}$

3. a

To determine

Calculate total flexible budget variance and indicate whether this variance is favorable (F), or favorable (U).

Explanation of Solution

Calculate total flexible budget variance and indicate whether this variance is favorable (F), or favorable (U).

$\begin{array}{c}\text{Total}\text{flexible-budget}\text{variance=}\left(\begin{array}{l}\text{Actual}\text{operating}\text{income}-\\ \text{Flexible}\text{budget}\text{operating}\text{income}\end{array}\right)\\ \text{=}\text{\$138,250}-\text{\$182,500}\\ \text{=\$44,250U}\end{array}$

Working note:

Calculate operating income for the month of October 2019:

Actual Operating Results
For the Month of October 2019
Sales (950 units × $835.00 per unit)	$793,250
Less: Total variable expenses	$475,000
Contribution margin	$318,250
Less: Fixed expenses	$180,000
Operating income	$138,250

Table (1)

3. b

To determine

Calculate total variable cost flexible budget variance and indicate whether this variance is favorable (F), or favorable (U).

Explanation of Solution

Calculate total variable cost flexible budget variance and indicate whether this variance is favorable (F), or favorable (U).

$\begin{array}{c}\begin{array}{l}\text{Total}\text{variable}\text{cost}\\ \text{flexible-budget}\text{variance}\end{array}\}\text{=}\left(\begin{array}{l}\text{Actual}\text{variable}\text{costs}-\\ \text{Flexible}\text{budget}\text{variable}\text{costs}\end{array}\right)\\ \text{=}\text{\$475,000}-\text{\$427,500}\\ \text{=\$47,500U}\end{array}$

3. c

To determine

Calculate total fixed cost flexible-budget variance and indicate whether this variance is favorable (F), or favorable (U).

Explanation of Solution

Calculate total fixed cost flexible-budget variance and indicate whether this variance is favorable (F), or favorable (U).

$\begin{array}{c}\begin{array}{l}\text{Total}\text{fixed}\text{cost}\\ \text{flexible-budget}\text{variance}\end{array}\}\text{=}\left(\begin{array}{l}\text{Actual}\text{fixed}\text{costs}-\\ \text{Flexible}\text{budget}\text{fixed}\text{costs}\end{array}\right)\\ \text{=}\text{\$180,000}-\text{\$150,000}\\ \text{=\$30,000U}\end{array}$

3. d

To determine

Calculate selling price variance and indicate whether this variance is favorable (F), or favorable (U).

Explanation of Solution

Calculate selling price variance and indicate whether this variance is favorable (F), or favorable (U).

$\begin{array}{c}\text{Selling}\text{price}\text{variance}\text{=}\left(\begin{array}{l}\text{Actual}\text{sales}\text{revenue}-\\ \text{Flexible-budget}\text{sales}\text{revenue}\end{array}\right)\\ \text{=}\text{\$793,250}-\text{\$760,000}\\ \text{=\$33,250F}\end{array}$

Prepare analysis of operating income:

Figure (2)

Calculate total master (static) budget variance:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{master}\text{(static)}\\ \text{budget}\text{variance}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{operating}\text{income}\text{variance}-\\ \text{Flexible}\text{budget}\text{variance}\end{array}\right)\\ \text{=}\text{\$61,750U}-\text{\$17,500U}\\ \text{=}\text{\$44,250}\end{array}$