Question

7-36 Comprehensive variance analysis review. Omega Animal Health, Inc. produces a generic medication used to treat cats with feline diabetes. The liquid medication is sold in 100 ml vials. Omega employs a team of sales representatives who are paid varying amounts of commission. Given the narrow margins in the generic veterinary drugs industry, Omega relies on tight standards and cost controls to manage its operations. Omega has the following budgeted standards for the month of April 2017: Average selling price per vial $ 9.40 Total direct materials cost per vial $ 3.90 Direct manufacturing labor cost per hour $ 17.00 Average labor productivity rate (vials per hour) Sales commission cost per unit $ 0.76 Fixed administrative and manufacturing overhead $ 800,000 per hour) 100 Omega budgeted sales of 800,000 vials for April. At the end of the month, the controller revealed that actual results for April had deviated from the budget in several ways: • • . . . . . Unit sales and production were 80% of plan. Actual average selling price increased to $9.50. Productivity dropped to 80 vials per hour. Actual direct manufacturing labor cost was $17.30 per hour. Actual total direct material cost per unit increased to $4.20. Actual sales commissions were $0.74 per unit. Fixed overhead costs were $30,000 above budget. Calculate the following amounts for Omega for April 2017: Required: 1. Static-budget and actual operating income 2. Static-budget variance for operating income 3. Flexible-budget operating income 4. Flexible-budget variance for operating income

Why the answer of flexible budget operating income is $2137600 instead of $ 2124800, also why the direct marketing in flexible budget is 96000

Answer 1

Dear Student,

I verified everything and flexible budget operating income should be  $2124800 only and direct manufacturing labor cost of $96000 in the flexible budget is a flaw. Actually it should be $108800

Comprehensive variance analysis review
Actual Results
Units sold (80% × 800,000)	640000
Selling price per unit	9.50
Revenues (640,000 × $9.50)	$6080000
Direct materials purchased and used:
Direct materials per unit	4.20
Total direct materials cost (640,000 × $4.20)	$2688000
Direct manufacturing labor:
Actual manufacturing rate per hour	$17.30
Labor productivity per hour in units	80
Manufacturing labor-hours of input (640,000 ÷ 80)	8000
Total direct manufacturing labor costs (8,000 × $17.30)	138400
Direct marketing costs:
Sales commissions per unit	$0.74
Total direct marketing costs (640,000 × $0.74)	473600
Fixed administrative and overhead costs ($800,000 + $300,000)	1100000
Static Budgeted Amounts
Units sold
Selling price per unit	$9.40
Revenues (800,000 × $9.40)	$7520000
Direct materials purchased and used:
Direct materials per unit	$3.90
Total direct materials costs (800,000 × $3.90)	$3120000
Direct manufacturing labor:
Direct manufacturing rate per hour	$17.00
Labor productivity per hour in units	100
Manufacturing labor-hours of input (800,000 ÷ 100)	8000
Total direct manufacturing labor cost (8,000 × $17.00)	$136000
Direct marketing costs:
Sales commissions per unit	$0.76
Total direct marketing cost (800,000 × $0.76)	$608000
Fixed administrative and overhead costs	$800000

Part 1

	Actual Results	Static-Budget Amounts
Revenues	6080000	7520000
Variable costs
Direct materials	2688000	3120000
Direct manufacturing labor	138400	136000
Direct marketing costs	473600	608000
Total variable costs	3300000	3864000
Contribution margin	2780000	3656000
Fixed costs	830000	800000
Operating income	$1950000	$2856000

Part 2

Actual operating income	1950000
Static-budget operating income	2856000
Total static-budget variance	$906000 U

Part 3

	Actual results	Flexible-budget variances	Flexible budget	Sales-volume variances	Static budget
Units (vials) sold	640000	0	640000	16000	800000
Revenues	6080000	64000 F	6016000	1504000 U	7520000
Variable costs
Direct materials	2688000	192000 U	2496000	624000 F	3120000
Direct manuf. Labor	138400	29600 U	108800	27200 F	136000
Direct marketing costs	473600	12800 F	486400	121600 F	608000
Total variable costs	3300000	208800 U	3091200	772800 F	3864000
Contribution margin	2780000	144800 U	2924800	731200 U	3656000
Fixed costs	830000	30000 U	800000	0	800000
Operating income	1950000	174800 U	2124800	731200 U	2856000

6400*17 = 108800

flexible budget operating income = $2124800