Chapter 16, Problem 40E

1.

To determine

Calculate a flexible budget contribution income statement for Qtr. 2, showing the Qtr. 2 results, the Qtr. 1 results, and the flexible budget.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

A Flexible Budget is a budget that shifts or flexes with volume or activity adjustments. The flexible budget is more streamlined and practical than a static budget.

The flexible budget contribution income statement for Qtr. 2, showing the Qtr. 2 results, the Qtr. 1 results, and the flexible budget is shown below:

		Qtr 1		Qtr 2
Sales Units		12,000		10,000
Sales mix for each product
Starlight		20%		25%
Moonlight		80%		75%
Price
Starlight		$ 35.00		$ 35.00
Moonlight		$85.00		$90.00
Variable Cost per unit
Starlight		$ 22.00		$ 22.00
Moonlight		$ 48.00		$ 48.00
Fixed Cost		$ 150,000		$ 150,000
		Qtr 2		Sales price Variance		Flexible Budget		Sales Volume Variance		Qtr 1
Sales
Starlight		$ 84,000				$84,000		$ (3,500))		$87,500
Moonlight		$ 816,000		$ (48,000)		864,000		189,000		675,000
Total sales		$900,000		(48,000)		$948,000		185,500		762,500
Less: Variable costs
Starlight		$52,800				$ 52,800		(2,200)		$55,000
Moonlight		460,800				460,800		100,800		360,000
Total variable costs		$513,600				$513,600		98,600		$415,000
Contribution Margin
Starlight		$31,200				$31,200		(1,300)		$ 32,500
Moonlight		355,200		(48,000)		403,200		88,200		315,000
Total contr. margin		$386,400		$ (48,000)		$434,400		$ 86,900		347,500
Less: Fixed costs		150,000								150,000
Operating Income		$236,400								$197,500
		Sales mix variance		Sales Quantity Variance		Volume Variance
Starlight		$(7,800)		$6,500		$(1,300)
Moonlight		25,200		63,000		$88,200
Total Contribution margin		$17,400		$69,500		$86,900

2.

To determine

Calculate the variances in volume for each product based on both sales dollars and contribution margins.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Variances may be characterized as the difference between the cost or income for an activity budgeted or planned and the actual cost or income for the activity.

Calculate the variances in volume for each product based on sales dollars:

Calculate the volume variances for Starlight:

$\begin{array}{c}\text{Starlight}=\left[\left(\text{.2}\times \text{12,}0 00\right)\text{–}\left(\text{.25}\times \text{10,000}\right)\right]\times \$35\\ =\$3,500\text{ U}\end{array}$

Calculate the volume variances for Moonlight:

$\begin{array}{c}\text{Moonlight}=\left[\left(\text{.80}\times 12,0 00\right)\text{–}\left(\text{.75}\times \text{10,000}\right)\right]\times \$90\\ =\$189,000\text{ F}\end{array}$

Calculate the variances in volume for each product based on contribution margin:

Calculate the volume variances for Starlight:

$\begin{array}{c}\text{Starlight}=\left[\left(\text{.2}\times 12,0 00\right)\text{–}\left(\text{.25}\times \text{10,000}\right)\right]\times (\$35-\$22)\\ =\$1,300\text{ U}\end{array}$

Calculate the volume variances for Moonlight:

$\begin{array}{c}\text{Moonlight}=\left[\left(\text{.80}\times 12,0 00\right)\text{–}\left(\text{.75}\times \text{10,000}\right)\right]\times (\$90-\$48)\\ =\$88,200\text{ F}\end{array}$

3.

To determine

Assess the variance in sales volume, the variance in sales mix, and the variance in selling quantities for each commodity, based on contribution margin.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money ear marked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Variances may be characterized as the difference between the cost or income for an activity budgeted or planned and the actual cost or income for the activity.

The variance in sales volume reflects the difference in contribution margin or operating earnings between a flexible budget and the master budget. The variance in the sales volume for a single product firm can be determined by multiplying the budgeted contribution margin per product unit times the difference between the number of units sold and the budgeted units sold for sale.

The variation in selling price is the difference between actual sales revenue for a year and the sales revenue for the duration in the flexible budget.

The variation in the sales mix is the consequence that the relative proportions of goods differ from the proportions budgeted have on the duration overall contribution margin.

Sales quantity variance reflects on variations between the number of units sold and the number of units budgeted for sale and tests the impact on operating results of these variations.

Compute the sales mix variance and the sales quantity variance for the each given product:

Contribution margin	Sales Mix Variance	Sales Quantity Variance	Volume Variance
Starlight	$(7,800)	$ 6,500	$ (1,300)
Moonlight	25,200	63,000	88,200
Total	$ 17,400	$69,500	$86,900

Calculate the sales mix variances for starlight:

$\begin{array}{c}\text{Starlight}=\left[\left(\text{0}\text{.2}-0.\text{25)}\times \text{12,000}\right)\right]\times \left(\text{\$35}-\text{\$22}\right)\\ =\$7,800\text{ U}\end{array}$

Calculate the sales mix variances for moonlight:

$\begin{array}{c}\text{One -inch}=\left[\left(\text{0}\text{.8}-0.75\text{)}\times \text{12,000}\right)\right]\times \left(\text{\$90}-\text{\$48}\right)\\ =\$25,200\text{ F}\end{array}$

Calculate the sales quantity variances for starlight:

$\begin{array}{c}\text{Starlight}=\left[\left(\text{12,000}-\text{10,000}\right)\right]\times .25\times \left(\text{\$35}-\text{\$22}\right)\\ =\$6,500\text{ F}\end{array}$

Calculate the sales quantity variances for moonlight:

$\begin{array}{c}\text{Moonlight}=\left[\left(12,000-\text{10,000}\right)\right]\times .75\times \left(\text{\$90}-\text{\$48}\right)\\ =\$63,000\text{ F}\end{array}$