Question

What is wrong with the following budget? Redo the budget so that it is a better basis of comparison (also use the contribution margin format)? Budget Actual Variance Units 1,000 1,200 (200) F $ 10,000 $11,000 (1,000) F (200) (300) $ 1,000 $ 2,000 $ 500 $ 2,000 $ 4,500 $ 1,200 $ 2,300 $ 650 $2,050 $ 4,800 (150) (50) (300) Sales COGS DM DL Machinery Repairs Plant Mgr. Salary Gross Profit Oper Exp. Packaging Shipping Sales Salaries Advertising Total Operating Exp. Income from Oper. chcClaas (10) (300) $ 500 $ 1,000 $ 500 $ 750 $2,750 $ 1,750 $ 510 $ 1,300 $ 500 $ 500 2,810 $ 1,990 250 (60) (240)

Answer 1

The budget provided in the question is wrong as the same is prepared on the basis of budgeted output, however for calculating variances and better comparison budgeted cost should applied on actual units. Accodingly we have reproduced the budget as flexible budget and also used the contribution margin format of preparing statement Contribution Margin Format Actual results Variable cost Flexible Budget (Details provided Variances (@ 19000 units) inQuestion) Cost Bugdet Figures as classification provided in Question per unit Unfavourable/fa vourable into Fixed or Variable Particulars (B)-(C) (A) (B) (A) 1200 C) Sales Volume 1000 12000 1,200 Sales (A) Variable Cost Direct Material Direct Labour Machine reppairs Packaging Shipping Advertising Total VC (B) 10,000.00 11000 11,000 1,000.00 variable 2,000.00 variable 500.00 Variable 500.00 Variable 1,000.00 Variable 750.00 Variable No impact 100.00 Favourable -50.00 Unfavourable 90.00 Favourable -100.00 Unfavourable 400.00 Favourable 1,200.00 1.00 1,200 2.00 2,400.00 2,300 0.50 600.00 650 0.50 600.00 510 1,200.00 1.00 1,300 900.00 0.75 500 5,750.00 6,900.00 6,460.00 Contribution (C A - B) 4,540.00 4,250.00 4,100.00 Contribution Margin Ratio (C/A) 0.43 0.37 0.41 Sales salary Plant Management salaries 500.00 Fixed No Impact -50 Unfavourable 500 500 2,000.00 Fixed 2,000 2,050 Total Fixed Cost (D) 2,500.00 2,500.00 2,550.00 Net Profit 1,600.00 1,750.00 1,990.00