Question

#4 only.

14-24 Master (Static) Budget Variance and Its Components As the new accountant for Cohen & Co., you have been asked to provide a succinct analysis of financial performance for the year just ended. You obtain the following information that pertains to the company's sole product: Actual Master (Static) Budget Units sold 40,000 45.000 Sales $350,000 $450.000 Variable costs 210,000 270.000 Fixed costs 145,000 135.000 Required 1. What was the actual operating income for the period? Show calculations, round your answer to the nearest whole dollar. 2. What was the company's master (static) budget operating income for the period? Show calculations, and round your answer to the nearest whole dollar. 3. (a) What was the total master (static) budget variance, in terms of operating income, for the period (rounded to nearest whole dollar)? (b) Is this variance favorable (F) or unfavorable (U)? Why? (Note: The total master (static) budget variance is also referred to as the total operating income variance for the period.) 4. The total master (static) budget variance for a period can be decomposed into a total flexible-budget variance and a sales volume variance. (a) What was to the nearest whole dollar) the total flexible-budget variance for the period? (b) Was this variance favorable (F) or unfavorable (U)? (c) What was the sales volume variance (to the nearest whole dollar) for the period? (d) Was this variance favorable (F) or unfavorable (U)?

Answer 1

To calculate both these variance we have to calculate flexible variance. This will be based on actual units but according to rates of master budget. In other words preparing master budget for actual units.

We will change variable portions like sales value and variable cost while keeping fixed cost same.

Sales = $450000/45000*40000 units = $400000

Variable cost = $270000/45000*40000 = $240000

Particulars	actual	master	Flexible Budget
Sales	$380000	$450000	$400000
Less variable cost	($210000)	($270000)	($240000)
Contribution	$170000	$180000	$160000
Less fixed cost	($145000)	($135000)	($135000)
Operating income	$25000	$45000	$25000

A) flexible budget variance - it is the difference in Operating income at the same units level that is flexible budget vs actual budget.

As we can see that operating income under both the budget is same so there is no variance.

B) there is no variance.

C) sales volume variance - it is the variance between Master budget vs flexible budget. As we can see that master budget has a higher operating income by $20000

D) sales variance is favorable. As we were able to earn more than what we would have According to flexible budget.

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