Chapter 23, Problem 1TI

Garland Company expects to sell 600 wreaths in December 2018, but wants to plan for 100 more and 100 less than expected. The wreaths sell for $5.00 each and have variable costs of $2.00 each. Fixed costs are expected to be $500 for the month. Prepare a flexible budget for 500, 600, and 700 wreaths.

To determine

Prepare a flexible budget for Company G.

Explanation of Solution

Flexible overhead budget:

A flexible overhead budget is referred as a thorough plan for controlling the overhead cost, and is valid for the firm’s relevant range of activity. Based on the standard input the flexible overhead budget is measured. (Example: Machine hours)

Prepare a flexible budget for Company G as follows:

Company G Flexible Budget For the Month Ended December 31, 2018
Particulars	Amount in ($)
Net sales revenue  (1)	$2,500	$3,000	$3,500
Less: Variable costs (2)	1,000	1,200	1,400
Contribution Margin	1,500	1,800	2,100
Less: Fixed Costs	500	500	500
Operating Income	$1,000	$1,300	$1,600

Table (1)

Working note (1):

Compute the net sales revenue:

Particulars	For 500 units	For 600 units	For 700 units
Number of Units (a)	500	600	700
Selling costs per unit (b)	$5.0	$5.0	$5.0
Net sales revenue $\left(\text{a}\times \text{b}\right)$	$2,500	$3,000	$3,500

Table (2)

Working note (2):

Compute the variable costs:

Particulars	For 500 units	For 600 units	For 700 units
Number of Units (a)	500	600	700
Variable costs per unit (b)	$2.0	$2.0	$2.0
Variable factory overhead cost $\left(\text{a}\times \text{b}\right)$	$1,000	$1,200	$1,400

Table (3)