
Concept explainers
a.
Prepare a flexible budget of the company and a schedule comparing the actual results with flexible budget amounts.
a.

Explanation of Solution
Budget:
Budget is an effective tool to achieve the financial and operational goals of the business. Budget is the key element of the financial planning and it assists managers to control the business costs. Management should set the budgeted amount at reasonable and achievable levels.
Prepare a flexible budget of the company and a schedule comparing the actual results with flexible budget amounts as follows:
Company E | |||
Comparison of Budgeted and Actual Revenue and Expenses | |||
For the Year Ended December 31 | |||
Particulars | Flexible Budget ($) (D) | Actual budget ($) (E) | Over (or under) budget ($) |
Net sales | 18,000,000 | 18,000,000 | - |
Less: Cost of goods sold | 11,700,000 (1) | 11,160,000 | (540,000) |
Gross profit on sales (A) | 6,300,000 | 6,840,000 | 540,000 |
Less: Operating expenses: | |||
Selling and promotion | 1,780,000 (2) | 800,000 | (980,000) |
Building occupancy | 480,000 (3) | 450,000 | (30,000) |
Buying | 1,000,000 (4) | 720,000 | (280,000) |
Delivery | 290,000 (5) | 200,000 | (90,000) |
Credit and collection | 240,000 (6) | 100,000 | (140,000) |
Administrative | 660,000 (7) | 360,000 | (300,000) |
Total operating expenses (B) | 4,450,000 | 2,630,000 | (1,820,000) |
Operating income | 1,850,000 | 4,210,000 | 2,360,000 |
Table (1)
Working note:
Calculate the cost of goods sold of the flexible budget
Calculate selling and promotion expense of the flexible budget
Calculate building occupancy expense of the flexible budget
Calculate buying expense of the flexible budget
Calculate delivery expense of the flexible budget
Calculate credit card collection expense of the flexible budget
Calculate administrative expense of the flexible budget
b.
Evaluate the company performance in relation to plan reflected in the flexible budget.
b.

Explanation of Solution
Evaluate the company performance in relation to plan reflected in the flexible budget as follows:
Net income in the actual budget is better than the flexible budget, because net income in the actual budget is increased by $2,360,000 than flexible budget. This result may be attributed by the following factors:
- Company performance in the purchase of merchandise is better in the actual budget.
- The company has incurred very lower expenditure in the actual performance (selling and promotion expense, building occupancy, buying expense, delivery expense, credit collection expense, and administrative expense) than the budgeted.
c.
Explain the reason why flexible budget is more useful in evaluating the performance of the Departmental Store F.
c.

Explanation of Solution
Explain the reason why flexible budget is more useful in evaluating the performance of the Departmental Store F as follows:
Flexible budget allows the manager to evaluate the results (output) at the different level of activity. It helps the manager to take correct decision regarding the controllable and non-controllable expenditures.
d.
Explain whether the fixed costs and variable costs would always change in a flexible budget or not.
d.

Explanation of Solution
Explain whether the fixed costs and variable costs would always change in a flexible budget or not as follows:
No, the fixed cost and variable costs would not always change in a flexible budget, because fixed cost remains the same in the all level of production. But, the variable cost would change based on the number of units produced at the various level of production.
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