Question

Check Plus Printers, Inc., produces luxury checkbooks with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the​ customer's bank. The​ company's operating budget for September 2017 included these​ data:

The budgeted amounts for September 2017 were:

Number of checkbooks	13,000
Selling price per book	$19
Variable cost per book	$6
Fixed costs for the month	$125,000

The actual results for September

2017

were as​ follows:

Number of checkbooks produced and sold	9,800
Average selling price per book	$21
Variable cost per book	$5
Fixed costs for the month	$131,000

The executive vice president of the company observed that the operating income for September was much lower than​ anticipated, despite a​ higher-than-budgeted selling price and a​ lower-than-budgeted variable cost per unit. As the​ company's management​ accountant, you have been asked to provide explanations for the disappointing September results.

Check Plus develops its flexible budget on the basis of budgeted​ per-output-unit revenue and​ per-output-unit variable costs without detailed analysis of budgeted inputs.

Requirements

1.	Prepare a​ static-budget-based variance analysis of the September performance.
2.	Prepare a​ flexible-budget-based variance analysis of the September performance.
3.	Why might Check Plus find the flexible budget based variance analysis more informative that the static budget based variance analysis. Explain your answer

Answer 1

1) Static variance is nothing but the difference observed between master budget and actual results. In case of revenues, if actual results are higher than master budget, it is favorable; if actual result is less than master budget, it is unfavorable. Similarly, in case of expenses, if actual result is higher than master budget, it is unfavorable; if actual result is less than master budget, it is favorable. Check Plus Printers, Inc. Static-budget-based variance analysis For the month of September 2017 Master Actual Variance Budget Revenue $247,000 $205,800 $41,200 Unfavorable Expenses: Variable cost $78,000 $49,000 $29,000 Favorable Fixed cost $125,000 $131,000 $6,000 Unfavorable Total Expenses $203,000 $180,000 $23,000 Favorable Net Income $44,000 $25,800 $18,200 Unfavorable

Workings: Check Plus Printers, Inc. Master Budget (Planned Static Budget) For the month of September 2017 Revenue $247,000 (13,000 x $19] Expenses: Variable cost $78,000 (13,000 x $6] Fixed cost $125,000 (Remains constant] Total Expenses $203,000 Net Income $44,000 [$247000 - $203000) Check Plus Printers, Inc. Actual results For the month of September 2017 Revenue $205,800 (9,800 x $21] Expenses: Variable cost $49,000 (9,800 x $5] Fixed cost $131,000 (Remains constant] Total Expenses $180,000 Net Income $25,800 [$205800 - $180000] 2 Flexible budget variance is nothing but the difference observed between flexible budget and actual results. In case of revenues, if actual results are higher than flexible budget, it is favorable; if actual result is less than flexible budget, it is unfavorable. Similarly, in case of expenses, if actual result is higher than flexible budget, it is unfavorable; if actual result is less than flexible budget, it is favorable. Flexible budget is prepared based on actual volume of sales but using master budget's per unit data. That is,

Workings: Check Plus Printers, Inc. Flexible Budget For the month of September 2017 Check Plus Printers, Inc. Flexible-budget-based variance analysis For the month of September 2017 Flexible Actual Variance Budget Revenue $186,200 $205,800 $19,600 Favorable Expenses: Variable cost $58,800 $49,000 $9,800 Favorable Fixed cost $125,000 $131,000 $6,000 Unfavorable Total Expenses $183,800 $180,000 $3,800 Favorable Net Income $2,400 $25,800 $23,400 Favorable $186,200 (9,800 x $19] Revenue Expenses: Variable cost Fixed cost Total Expenses Net Income $58,800 (9,800 x $6] $125,000 (As per master budget] $183,800 $2,400 ($186200 - $183800] 3) As flexible budget is prepared based on actual volume of sales but using master budget's per unit data, it is better to evaluate performance with the help of flexible budget performance report instead of master budget performance report. Flexible budget helps to understand revenue and cost behavior effectively than master budget. So, Check Plus might find the flexible budget based variance analysis more informative that the static budget based variance analysis.