Chapter 15, Problem 20P

a)

To determine

Prepare a pro forma income statement that would appear in the master budget of Company L.

Explanation of Solution

Master budget: Master budget is an interrelated budget that collectively summarizes all the planned activities of the business. Master budget is not a single document and it consist the number of interrelated budgets like sales budget, production budget, and cash budget. Master budget helps the management to review the upcoming quarter budget with the monthly amount of budget figures.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare a pro forma income statement:

Master Budget
Particulars	Standard Costs per unit	Revenue at 30,000 Units
Sales revenue	$ 45.00	$ 1,350,000
Less: Variable manufacturing costs
Materials	$ 9.00	($ 270,000)
Labor	$ 4.50	($ 135,000)
Overhead	$ 6.30	($ 189,000)
Variable selling, general, & administrative cost	$ 7.20	($ 216,000)
Contribution margin		$ 540,000
Less: Fixed costs
Manufacturing		($ 135,000)
Selling, general, & administrative cost		($ 54,000)
Net income		$ 351,000

Table (1)

b)

To determine

Prepare flexible budget income statements with production volume of 29,000 and 31,000.

Explanation of Solution

Flexible Budget: A flexible budget is a budget that is prepared for different levels of the output. In other words, it is a budget that adjusts according to the changes in the volume of the activity. The main purpose of preparing flexible budget is to determine the differences among standard and actual result.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare flexible budget income statements with production volume of 29,000 and 31,000:

Flexible Budget
Particulars	Standard Costs per unit	Revenue at 29,000 Units	Revenue at 31,000 Units
Sales revenue	$ 45.00	$ 1,305,000	$ 1,395,000
Less: Variable manufacturing costs
Materials	$ 9.00	($ 261,000)	($ 279,000)
Labor	$ 4.50	($ 130,500)	($ 139,500)
Overhead	$ 6.30	($ 182,700)	($ 195,300)
Variable selling, general, & administrative cost	$ 7.20	($ 208,800)	($ 223,200)
Contribution margin		$ 522,000	$ 558,000
Less: Fixed costs
Manufacturing		($ 135,000)	($ 135,000)
Selling, general, & administrative cost		($ 54,000)	($ 54,000)
Net income		$ 333,000	$ 369,000

Table (2)

c)

To determine

Compute the variable and sales cost volume variance with volume of 31,000 units.

Explanation of Solution

Variance: Variance refers to the difference level in the actual cost incurred and standard cost. The total cost variance is subdivided into separate cost variances; this cost variance indicates that the amount of variance that is attributable to specific casual factors.

Sales volume variance: Sales volume variance is the measure of change in profit due to the difference between the budgeted quantity of units sold and the actual quantity of units sold. It reflects the deviation between the actual quantity of the units sold and the budgeted quantity of units sold.

Compute the variable and sales cost volume variance with volume of 31,000 units:

Computation of variable and sales cost volume variance
Particulars	Standard Costs per unit	Master Budget	Flexible Budget	Variances
		Revenue at 30,000 Units	Revenue at 31,000 Units
Sales revenue	$ 45.00	$ 1,350,000	$ 1,395,000	$45,000
Less: Variable manufacturing costs
Materials	$ 9.00	($ 270,000)	($ 279,000)	$9,000
Labor	$ 4.50	($ 135,000)	($ 139,500)	$4,500
Overhead	$ 6.30	($ 189,000)	($ 195,300)	$6,300
Variable selling, general, & administrative cost	$ 7.20	($ 216,000)	($ 223,200)	$7,200
Contribution margin		$ 540,000	$ 558,000	$18,000
Less: Fixed costs
Manufacturing		($ 135,000)	($ 135,000)	0
Selling, general, & administrative cost		($ 54,000)	($ 54,000)	0
Net income		$ 351,000	$ 369,000	$18,000

Table (3)

d)

To determine

Identify whether the variances are unfavourable or favourable

Explanation of Solution

Variance: Variance refers to the difference level in the actual cost incurred and standard cost. The total cost variance is subdivided into separate cost variances; this cost variance indicates that the amount of variance that is attributable to specific casual factors.

Identify whether the variances are unfavourable or favourable:

Computation of variable and sales cost volume variance
Particulars	Standard Costs per unit	Master Budget	Flexible Budget	Variances	Favorable or unfavorable
		Revenue at 30,000 Units	Revenue at 31,000 Units
Sales revenue	$ 45.00	$ 1,350,000	$ 1,395,000	$45,000	Favorable
Less: Variable manufacturing costs
Materials	$ 9.00	($ 270,000)	($ 279,000)	$9,000	Unfavorable
Labor	$ 4.50	($ 135,000)	($ 139,500)	$4,500	Unfavorable
Overhead	$ 6.30	($ 189,000)	($ 195,300)	$6,300	Unfavorable
Variable selling, general, & administrative cost	$ 7.20	($ 216,000)	($ 223,200)	$7,200	Unfavorable
Contribution margin		$ 540,000	$ 558,000	$18,000	Favorable
Less: Fixed costs
Manufacturing		($ 135,000)	($ 135,000)	0
Selling, general, & administrative cost		($ 54,000)	($ 54,000)	0
Net income		$ 351,000	$ 369,000	$18,000	Favorable

Table (5)

e)

To determine

Explain the manner in which Company L can use the variance to assess the performance.

Explanation of Solution

Variance: Variance refers to the difference level in the actual cost incurred and standard cost. The total cost variance is subdivided into separate cost variances; this cost variance indicates that the amount of variance that is attributable to specific casual factors.

The sales and volume variances assist the managers to evaluate the changes in the sales volume that affect the costs and revenues. Since, the flexible budget is computed at the standard costs and prices, so the variance might not provide insights into the differences between the actual cost and prices and standard cost and prices.