Question

CC Corp estimated the following financial data, for the 2020 production budget:

• Sales of 122,000 units
• Sales price of $40 per unit
• Variable expenses of $9.90 per unit
• Fixed costs of $3,050,000 for the year

At year end, actual sales data and costs were:

• Sales of 125,000 units
• Sales price of $38 per unit
• Variable expenses of $10.50 per unit
• Fixed costs of $3,000,000 for the year

1. Create an Income Statement Performance Report, including favourable/unfavourable ratings for all Flex Budget Variances and Sales Volume Variances.
2. Briefly explain the operating income flex budget result.
3. If the Direct Materials Price Variance was $50,000 Favourable, and the Direct Materials Efficiency Variance was $90,000 Unfavourable, what was the Direct Labour Flex Budget Variance? Assume that the only other variable expense was variable overhead, and that its flex budget variance was zero.

Answer 1

ANSWER

a).

Units	Budgeted amounts per unit	Actual results	Flexible budget variance		Flexible budget	Sales volume variance		Static Budget
		125,000			125,000			122,000
Sales revenue	40	4750000	250000	U	5000000	120000	F	4880000
Variable costs	9.9	1312500	75000	U	1237500	29700	U	1207800
Contribution margin		3437500	325000	U	3762500	90300	F	3672200
Fixed expenses		3,000,000	50,000	F	3,050,000	0		3,050,000
Operating income		437500	275000	U	712500	90300	F	622200

b).

The flexible budget variances are all unfavorable since the actual selling price is less than the budgeted selling price. Also the variable costs is higher than the budgeted cost per unit. However, only the fixed expenses are less than the budgeted costs. Hence, the managers have done a poor job in controlling the variances i.e. the sales price and variable cost variance. The savings in fixed costs also does not off set the negative contribution variance.

c).

Direct material flex budget variance = 50000 F + 90,000 UF = 40,000 UF

Direct labor flex budget variance = Total flex variable cost budget variance -Direct material flex budget variance =   75000 - 40000UF = 35000 UF

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