Chapter 8, Problem 2PSA

To determine

Concept introduction:

Flexible Budget:

A flexible budget, also known as variation budget adjusts to changes in volume or activity. Flexible budgets are prepared for comparing actual to budgeted performances at many levels of activity during the previous year. In order to accurately predict the changes in costs, management identifies them into fixed or variable costs.

Requirement 1:

Flexible budget performance report for 2015 of the company.

Answer to Problem 2PSA

Flexible budget performance report for the year ended December 31, 2015 (Amount in $):

Particulars	Flexible budget	Actual Results	Variances	Favorable/ Unfavorable
Sales (18, 000 units)	36, 00, 000	36, 48, 000	48, 000	F
Variable costs:
Direct materials	11, 70, 000	11, 85, 000	15, 000	U
Direct labor	2, 70, 000	2, 78, 000	8, 000	U
Machinery repairs	72, 000	63, 000	9, 000	F
Utilities	54, 000	53, 000	1, 000	F
Packaging	90, 000	87, 500	2, 500	F
Shipping	1, 26, 000	1, 18, 500	7, 500	F
Total variable costs	17, 82, 000	17, 85, 000	3, 000	U
Contribution margin	18, 18, 000	18, 63, 000	45, 000	F
Fixed costs:
Depreciation- plant equipment	3, 00, 000	3, 00, 000	0
Utilities	1, 50, 000	1, 47, 500	2, 500	F
Plant management salaries	2, 00, 000	2, 10, 000	10, 000	U
Sales salary	2, 50, 000	2, 68, 000	18, 000	U
Advertising expense	1, 25, 000	1, 32, 000	7, 000	U
Salaries	2, 41, 000	2, 41, 000	0
Entertainment expense	90, 000	93, 500	3, 500	U
Total fixed costs	13, 56, 000	13, 92, 000	36, 000	U
Income from operations	4, 62, 000	4, 71, 000	9, 000	F

Explanation of Solution

For preparation of flexible budget of the company, following formulas would be used:

$Sellingpriceperunit=Sales/Numberofunitssold$

$Variablecost=Variablecostperunit*Numberofunitssold$

As per information in problem 8-1A, it is given that sales are $30, 00, 000 and sales volume is 15, 000 units. Flexible budget has to be prepared at sales volume of 18, 000 units. Now, required calculations have been made in the following manner:

Particulars	Amount per unit	Amount
Sales (18, 000 units)	$30, 00, 000/ 15, 000 units = $200	$200*18, 000 units = $36, 00, 000
Variable costs:
Direct materials	$9, 75, 000/ 15, 000 units = $65	$65*18, 000 units = $11, 70, 000
Direct labor	$2, 25, 000/ 15, 000 units = $15	$15*18, 000 units = $2, 70, 000
Machinery repairs	$60, 000/ 15, 000 units = $4	$4*18, 000 units = $72, 000
Utilities	$45, 000/ 15, 000 units = $3	$3 *18, 000 units=$54, 000
Packaging	$75, 000/ 15, 000 units = $5	$5*18, 000 units = $90, 000
Shipping	$1, 05, 000/ 15, 000 units = $7	$7*18, 000 units = $1, 26, 000
Total variable costs	$99	17, 82, 000

Further, contribution margin can be calculated using the below- mentioned formulas:

$Contributionmarginperunit=Sellingpriceperunit-Totalvariablecostsperunit$

$Contributionmargin=Sales-Totalvariablecosts$

Thus, contribution margin would be:

$Contributionmarginperunit=\$200-\$99=\$101$

$Contributionmargin=\$36,00,000-\$17,82,000=\$18,18,000$

Fixed costs would remain same irrespective of the changes in sales volume. Also, Income from operations can be computed using the following formula:

$Incomefromoperations=Contributionmargin-Fixedcosts$

$Incomefromoperations=\$18,18,000-\$13,56,000=\$4,62,000$

Further, variances can be calculated using the following formula:

$Salesvariance=Actualsales-Budgetedsales$

$Directmaterialcostvariance=Budgetedmaterial-Actualmaterialsused$

Therefore, flexible budget performance report as asked in the given problem is given below:

Flexible budget performance report for the year ended December 31, 2015 (Amount in $):

Particulars	Flexible Budget	Actual Results	Variances	Favorable/ Unfavorable
Sales (18, 000 units)	36, 00, 000	36, 48, 000	48, 000	F
Variable costs:
Direct materials	11, 70, 000	11, 85, 000	15, 000	U
Direct labor	2, 70, 000	2, 78, 000	8, 000	U
Machinery repairs	72, 000	63, 000	9, 000	F
Utilities	54, 000	53, 000	1, 000	F
Packaging	90, 000	87, 500	2, 500	F
Shipping	1, 26, 000	1, 18, 500	7, 500	F
Total variable costs	17, 82, 000	17, 85, 000	3, 000	U
Contribution margin	18, 18, 000	18, 63, 000	45, 000	F
Fixed costs:
Depreciation- plant equipment	3, 00, 000	3, 00, 000	0
Utilities	1, 50, 000	1, 47, 500	2, 500	F
Plant management salaries	2, 00, 000	2, 10, 000	10, 000	U
Sales salary	2, 50, 000	2, 68, 000	18, 000	U
Advertising expense	1, 25, 000	1, 32, 000	7, 000	U
Salaries	2, 41, 000	2, 41, 000	0
Entertainment expense	90, 000	93, 500	3, 500	U
Total fixed costs	13, 56, 000	13, 92, 000	36, 000	U
Income from operations	4, 62, 000	4, 71, 000	9, 000	F

Thus, income from operations of the company at flexible budget is coming out to be $4, 62, 000.

To determine

Concept introduction:

Sales variance:

It is the monetary difference between actual and budgeted sales. It is used to analyze changes in sales level over time. It can be calculated using the following formula:

$Salesvariance=Actualsales-Budgetedsales$

Direct material cost variance:

It is the difference between standard cost of direct materials specified for the output achieved and the actual cost of direct materials used and can be calculated as under:

$Directmaterialcostvariance=Budgetedmaterial-Actualmaterialsused$

Requirement 2:

Analyze and interpret (a) sales variance and (b) direct materials cost variance.

Answer to Problem 2PSA

Sales variance of the company is favorable because the budgeted sales figure is less than that of actual sales during the period.

Direct material cost variance of the company is unfavorable due to the reason that the actual materials used were more than that of budgeted materials.

Explanation of Solution

Sales variance can be calculated using the following formula:

$Salesvariance=Actualsales-Budgetedsales$

The calculation for same has been tabulated below:

Particulars	Amount (In $)	Amount per unit (In $)
Budgeted sales (A)	36, 00, 000	200
Actual sales (B)	36, 48, 000	$36, 48, 000/ 18, 000 units = $202.67
Sales variance (B-A) (Favorable)	48, 000	2.67

Also, direct material cost variance can be computed using the below- mentioned formula:

$Directmaterialcostvariance=Budgetedmaterial-Actualmaterialsused$

The calculation for same has been tabulated below:

Particulars	Amount (In $)	Amount per unit (In $)
Budgeted materials (A)	11, 70, 000	65
Actual materials used (B)	11, 85, 000	$11, 85, 000/ 18, 000 units = $65.83
Direct materials cost variance (A-B) (Unfavorable)	15, 000	0.83

Analysis of sales and direct materials cost variance:

Sales variance of the company is favorable because the budgeted sales figure is less than that of actual sales during the period. Also, per unit cost of actual sales is higher than that of budgeted sales.

Further, direct material cost variance of the company is unfavorable due to the reason that the actual materials used were more than that of budgeted materials. Also, per unit cost of actual materials is paid more than that estimated for budgeted materials.