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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: | ||||
| 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:
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:
Thus, contribution margin would be:
Fixed costs would remain same irrespective of the changes in sales volume. Also, Income from operations can be computed using the following formula:
Further, variances can be calculated using the following formula:
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.
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:
Direct material cost variance:
It is the difference between
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:
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:
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.
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Chapter 8 Solutions
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