Question

The following information is available for Brownstone Products Company for the month of July: Master Budget Actual Units 4,000 $60, 200 $60,000 16,000 13,900 3,900 Sales revenue Variable manufacturing costs Fixed manufacturing costs Variable selling and administrative expenses Fixed selling and administrative expenses 20,000 14,900 8,700 8,000 10,100 10,000 Required: 1. What was the total operating income variance for July? (Note: this variance is also called the master (static) budget variance for the period.) Was this variance favorable (F) or unfavorable (U)? 2. Compute the July sales volume variance and the flexible-budget variance for the month, both in terms of contribution margin and in terms of operating income. 4. Prepare pro forma budgets for activities within its relevant range of operations. Prepare a flexible budget for each of the following two output levels: a. 3,850 units b. 4,250 units. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 4 What was the total operating income variance for July? (Note: this variance is also called the master (static) budget variance for the period.) Was this variance favorable (F) or unfavorable (U)? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) 1 of 4 Prev Next

Answer 1

flexible budget changes with the change in levels of activity.It is a budget which recognizes the effect of fluctuations in sales on variable , fixed and mixed cost.it is well known fact that estimated activity of budget is not always correct and that changes will have to be made as per actual known activity level to find exact variances.variable costs changes with change in levels of activity however fixed cost remains same at all levels.

(1) static budget operating income variance is difference between actual and budgeted income.

	budgeted	Actual
Revenue	$60,000	$60,200
variable manufacturing cost	$16,000	$20,000
fixed manufacturing cost	$13,900	$14,900
variable selling and administrative expense	$8,000	$8,700
fixed selling and administrative expense	$10,000	$10,100
Net operating Income	$12,100[60000-16000-13900-8000-10000]	$6,500

actual income is lesser than budgeted so the variance is Unfavorable by $5,600 [12100-6500]

(2) July sales volume variance and flexible budget variance

volume variance is difference between flexible budget and actual budget . flexible budget variance is difference between actual cost and flexible budget.

	Actual	flexible budget variance	flexible budget	sales volume variance	master budget
units	3900		3900	100 unfavorable [3900-4000]	4000
sales	$60,200	$1,700 favorable[60200-58500]	$58,500[60000/4000*3900]	$1500 unfavorable[58500-60000]	$60,000
variable costs:
manufacturing	$20,000	$4,400unfavorable [20000-15600]	$15,600[16000/4000]*3900	$400 favorable[15600-16000]	$16,000
selling and administrative	$8,700	$900 unfavorable[8700-7800]	$7,800[8000/4000*3900]	$200 favorable[7800-8000]	$8,000
total variable costs	$28,700[20000+8700]	$5,300 unfavorable[28700-23400]	$23,400 [24000/4000]*3900	$600 favorable[23400-24000]	$24,000[16000+8000]
contribution margin	$31,500[60,200-28,700]	$3600 unfavorable [31500-35100]	$35,100[58,500-23400]	$900 unfavorable[35100-36000]	$36,000[60,000-24,000]
fixed costs
manufacturing	$14,900	$1000 unfavorable [14900-13900]	$13,900	$0	$13,900
selling and administration	$10,100	$100 unfavorable [10100-10000]	$10,000	$0	$10,000
total fixed costs	$25,000[14900+10100]	$1,100unfavorable [25000-23900]	$23,900	$0	$23,900 [13900+10000]
operating income	$6,500[31500-25000]	$4,700 unfavorable[3600-1100]	$11,200[35100-23900]	$900 unfavorable	$12,100[36000-23900]

sales volume variance

contribution margin = $900 unfavorable

operating income = $900 unfavorable

flexible budget variance =

contribution margin = $3600 unfavorable

operating income = $4700 unfavorable

(4)

a.flexible budget

	flexible budget	flexible budget	Master budget
units	3850	4250	4000
sales	$57,750[60000/4000*3850]	$63,750[60000/4000*4250]	$60,000
variable costs:
manufacturing	$15,400[16000/4000]*3850	$17,000[16000/4000*4250]	$16,000
selling and administrative	$7,700[8000/4000*3850]	$8,500[8000*4000*4250]	$8,000
total variable costs	$23,100[15400+7700]	$25,500[17000+8500]	$24,000[16000+8000]
contribution margin	$34,650[57750-23100]	$38,250[63750-25500]	$36,000[60,000-24,000]
fixed costs
manufacturing	$13,900	$38,250	$13,900
selling and administration	$10,000	$10,000	$10,000
total fixed costs	$23,900	$23,900	$23,900 [13900+10000]
operating income	$10,750[34650-23900]	$14,350[38250-23900]	$12,100[36000-23900]