Question

The management of Benson Modems, Inc. (BMI) is uncertain as to the volume of sales that will exist in Year 1. The president of the company asked the chief accountant to prepare flexible budget income statements assuming that sales activity amounts to 5,000 and 7,000 units. The static budget is shown in the following form. Required a. Complete the following worksheet to prepare the appropriate flexible budgets. b. Calculate and show the flexible budget variances for the static budget versus the flexible budget at 7,000 units. c. Indicate whether each variance is favorable (F) or unfavorable (U). (Select "None" if there is no effect (.e., zero variance).) Volume Variance BENSON MODEMS, INC. Flexible Budget Income Statements Cost per Static Flexible Budgets unit Budget Number of units 6,000 5,000 7,000 Sales revenue $ 115 $ 690,000 Variable manufacturing costs: Materials 40 240,000 Labor 25 150,000 Overhead 30,000 Variable selling, general & administrative 42,000 Contribution margin 228,000 Fixed costs: Manufacturing rent 53,000 Depreciation on manufacturing equipment 63,000 Selling, general & administrative expenses 76,600 Depreciation on administrative equipment 15,000 Net income (loss) $ 20,400 $(17,600) $ 58,400 5

Answer 1

Variable cost varies with number of units where as fixed cost remains constant irrespective of number of units sold or produced .

Selling price -Total variable cost =contribution margin

Net income /9loss)=contribution margin -fixed cost

Volume variance =static budget -Flexible budget at 7000 units

BENSON MODEMS INC. Flexible budget income statement
	cost per unit	Static budget	Flexible budget [cost per unit *units]		volume variance
Number of units		6000	5000	7000	1000	F
sales revenue	115	690000	115*5000= 575000	115*7000= 805000	690000-805000=115000	F
variable manufacturing cost
Materials	40	240000	200000	280000	240000-280000=40000	U
labor	25	150000	125000	175000	25000	U
overhead	5	30000	25000	35000	5000	U
variable selling and administrative	7	42000	35000	49000	7000	U
contribution margin	38	228000	190000	266000	38000	F
Fixed cost
manufacturing rent		53000	53000	53000	0	None
Depreciation on manufacturing equipment		63000	63000	63000	0	None
selling,general and administrative expense		76600	76600	76600	0	None
Depreciation on administrative equipment		15000	15000	15000	0	None
Net income /(loss)		20400	(17600)	58400	38000	F

**Criteria or variance:

Revenue :If Revenue in flexible budget is higher than static budget then variance is favorable otherwise Unfavorable

Expense :If expenses in flexible budget is higher than static budget then variance is unfavorable otherwise unfavorable