Question

Here is the data that Vroom-Vroom used for their budgets:

Monthly Budget Data:
Selling Price per uniit:	$            70.00	each
Raw Materail Cost	$            30.00	each
Packaging Costs	$            10.00	each
Electricity	$               3.00	each
Waste and Other Costs	$               5.00	each
Salary and Wages Costs	$        450,000	per month
Fringe Benefits	50%	of Salaries
Rent Costs	$        500,000	per month
Insurance Costs	$          70,000	per month
Depreciation Costs	$        250,000	per month

Vroom-Vroom estimated sales/production will be between 100,000 and 300,000 cars per month. Their static budget is based on 200,000 cars sold per month. Assume that all units produced in a month are also sold in that month. Vroom-Vroom’s unit of production/sale is a car (unit/each).

Here are the Actual Results in December and January:

Actual Data:		December	January
Production (Units)		375,000	150,000
Revenue		$        26,300,000	$        10,300,000
Raw Materials		$        11,348,500	$          4,485,000
Packaging Materials		$          3,720,000	$          1,445,000
Electricity		$          1,125,000	$              460,000
Waste and Other Costs		$          1,888,000	$              750,000
Wages		$              500,000	$              450,000
Fringe Benefits		$              250,000	$              225,000
Rent		$              500,000	$              500,000
Insurance		$                70,000	$                75,000
Depreciation		$              250,000	$              240,000

Question 2: Prepare a flexible budget in Excel for Vroom-Vroom.

1. Show the flexible budget for December in Contribution Margin Income Statement format.
2. Compare December’s flexible budget to December’s actual results. Specify which line items are favorable or unfavorable and how much.
3. For Ingredient Costs and Packaging Costs, break out the Price and Volume Variances for December. Provide potential explanations
4. Show the flexible budget for January in Contribution Margin Income Statement format.
5. Compare January’s flexible budget to January’s actual results. Specify which line items are favorable or unfavorable and how much.
6. For Ingredient Costs and Packaging Costs, break out the Price and Volume Variances for January. Provide potential explanations for each one.

Answer 1

VROOM VROOM
Flexible Budget for December
Description	Actuals Results			Flexible Budget	Variance	F/U
		Actual Qty	Budgeted Rates
Production (Units)	375,000			375,000
Revenue	$26,300,000	375,000	$70.00	$26,250,000	$50,000	U
Variable Expenses
Direct Material
Raw Materials	$11,348,500	375,000	$30.00	$11,250,000	$98,500	U
Packaging Materials	$3,720,000	375,000	$10.00	$3,750,000	$30,000	F
Variable Manufacturing Overheads
Electricity	$1,125,000	375,000	$3.00	$1,125,000	$0
Waste and Other Costs	$1,888,000	375,000	$5.00	$1,875,000	$13,000	U
Total Variable Expenses	$18,081,500			$18,000,000	$81,500	U
Contribution Margin	$8,218,500			$8,250,000	$31,500	F
Fixed Overheads
Wages	$500,000			$450,000	$50,000	U
Fringe Benefits	$250,000			$225,000	$25,000	U
Rent	$500,000			$500,000	$0
Insurance	$70,000			$70,000	$0
Depreciation	$250,000			$250,000	$0
Net Profit	$6,648,500			$6,755,000	$106,500	U
Note -1 : F means "Variance is Favorable" & "U" means Variance is unfavorable
Note -2 : Since Wages have been paid on monthly basis instead of hourly basis, we have treated Direct
Labor as Fixed Cost
Ingredient Material Variance Computations
Material Price Variance = ( Actual Price - Standard Price ) * Actual Quantity
Actual Price per unit = Actual Sales Value/Actual Quantity
= $ 11,348,500/375,000
= $ 30.2627
Material Price Variance = ( $ 30.26 - $ 30) * 375,000
= $ 0.2627 * 375,000
= $ 98,512
Material Volume Variance = (Actual Quantity - Standard Quantity) * Standard Price
= ( 375,000 -375000) * 30
= 0
Packaging Materials Variance Computation
Material Price Variance = ( Actual Price - Standard Price ) * Actual Quantity
Actual Price per unit = Actual Sales Value/Actual Quantity
= $ 3,720,000/375,000
= $ 9.92
Material Price Variance = ( $ 9.92 - $ 10) * 375,000
= ($ 0.08) * 375,000
= ($ 30,000)
Material Volume Variance = (Actual Quantity - Standard Quantity) * Standard Price
= ( 375,000 -375000) * 10
= 0
When Flexible budgets are prepared,the standard rates are imposed on the actual quantities Hence, the variances
in flexible budgets are wholly due the variation in the actual price and standard price.
This is evident from the calculations above showing the Volume variance both in case of the Ingredient materials
and the packaging material is zero.
The flexible budget variance of the ingredient material is unfavorable because the actual price is higher than the
standard price.
The flexible budget variance of the packaging material is unfavorable because the actual price is lower than the
standard price.
VROOM VROOM
Flexible Budget for January
Description	Actual Results			Flexible Budget	Variance	F/U
		Actual Qty	Budgeted Rates
Production (Units)	150,000			150,000
Revenue	$10,300,000	150,000	$70.00	$10,500,000	$200,000	U
Variable Expenses
Direct Material
Raw Materials	$4,485,000	150,000	$30.00	$4,500,000	$15,000	F
Packaging Materials	$1,445,000	150,000	$10.00	$1,500,000	$55,000	F
Variable Manufacturing Overheads
Electricity	$460,000	150,000	$3.00	$450,000	$10,000	U
Waste and Other Costs	$750,000	150,000	$5.00	$750,000	$0
Total Variable Expenses	$7,140,000			$7,200,000	$60,000	F
Contribution Margin	$3,160,000			$3,300,000	$140,000	U
Fixed Overheads
Wages	$450,000			$450,000	$0	U
Fringe Benefits	$225,000			$225,000	$0	U
Rent	$500,000			$500,000	$0
Insurance	$75,000			$70,000	$5,000	U
Depreciation	$240,000			$250,000	$10,000	F
Net Profit	$1,670,000			$1,805,000	$135,000	U
Ingredient Material Variance Computations
Material Price Variance = ( Actual Price - Standard Price ) * Actual Quantity
Actual Price per unit = Actual Sales Value/Actual Quantity
= $ 4,485,000/150,000
= $ 29.90
Material Price Variance = ( $ 29.90 - $ 30) * 150,000
= ($ 0.10) * 150,000
= ($ 15,000)
Material Volume Variance = (Actual Quantity - Standard Quantity) * Standard Price
= ( 150,000 -150,000) * 30
= 0
Packaging Materials Variance Computation
Material Price Variance = ( Actual Price - Standard Price ) * Actual Quantity
Actual Price per unit = Actual Sales Value/Actual Quantity
= $ 1,445,000/150,000
= $ 9.63
Material Price Variance = ( $ 9.63 - $ 10) * 150,000
= ($ 0.37) * 150,000
= ($ 55,500)
Material Volume Variance = (Actual Quantity - Standard Quantity) * Standard Price
= ( 150,000 -150,000) * 10
= 0
When Flexible budgets are prepared,the standard rates are imposed on the actual quantities Hence, the variances
in flexible budgets are wholly due the variation in the actual price and standard price.
This is evident from the calculations above showing the Volume variance both in case of the Ingredient materials
and the packaging material is zero.
The flexible budget variance of the ingredient material is favorable because the actual price is lower than the
standard price.
The flexible budget variance of the packaging material is unfavorable because the actual price is lower than the
standard price.
Note - Since, Flexible Budget Variance = Material Price Variance + Material Volume Variance
In the above example, there is minor difference in total flexible budget variance and sum of
materials price variance and material volume variance because the actual prices calculated
have been rounded off to 2 decimal places.