Question

Question one: phone technologies manufacturers capacitors for cellular base stations and other communications applications.

Question 1 Phone Technologies manufactures capacitors for cellular base stations and other communications applications. The company's July 2014 flexible budget shows output levels of 7,500, 9,000, and 11,000 units. The static budget was based on expected sales of 9,000 units Phone Technologies Flexible Budget For the Month Ended July 31, 2014 Budget Amount Per Unit By Units 9.000 7,500 11,000 Sales Revenue $ 22 $ 165,000 $ 198,000 $ 242,000 82,500 99,000 121,000 Variable Expenses 11 Contribution Margin 99,000 121,000 82,500 57,000 57,000 57,000 Fixed Expenses 25,500$ 42,000 $ 64,000 Operating Income The company sold 11,000 units during July, and its actual operating income was as follows: Phone Technologies Income Statement For the Month Ended July 31, 2014 Sales Revenue $ 249,000 126,100 Variable Expenses Contribution Margin 122,900 58,000 Fixed Expenses $ 64,900 Operating Income Requirements 1. Prepare a flexible budget performan ce report for July 2. What was the effect on Phone's operating income of selling 2,000 units more than the static budget level of sales? 3. What is Phone's static budqet variance? 4. Explain why the flexible budget performance report provides more useful information to Phone's managers than the simple static budget variance. What insights can Phone's managers draw from this performance report?

Answer 1

Answer 1:

Phone Technologies Flexible Budget Performance Report For the Month Ended July. 31, 2014 Flexible Actual Results Budget 11,000 11,000 Revenue and Spending Variances Units sold Sales Revenue Variable Expenses Contribution Margin Fixed Expenses Operating Income $249,000 $126,100 $122,900 $58,000 $64,900 $242,000 $121,000 $121,000 $57,000 $64,000 $7,000 $5,100 $1,900 $1,000 $900 F

Answer 2:

Contribution margin per unit = Sales price - variable cost = $22 - $11 = $11

Effect on operating income of selling 2,000 more than the static budget level of sales = 2000 * $11 = $22,000

Hence:

Effect on operating income of selling 2,000 more than the static budget level of sales:

Increase in operating income by = $22,000

Answer 3:

Static Budget variance report:

Phone Technologies Static Budget Performance Report For the Month Ended July. 31, 2014 Actual Results Static Budget 11,000 9,000 Activity Variances Units sold -| Sales Revenue Variable Expenses Contribution Margin Fixed Expenses Operating Income $249,000 $126,100 $122,900 $58,000 $64,900 $198,000 $99,000 $99,000 $57,000 $42,000 $51,000 $27,100 $23,900 $1,000 $22,900 |E|-

Answer (4):

Flexible budget performance provides more useful information than static budget variance:

Flexible budget reports revenue and cost budget figures based on actual activity level. Since the activity levels of flexible budget and actual budget are same, the figures are comparable and analysis of the variances is useful to analyse, find root causes and for taking actions.

The static budget variance is composite variances which consist of variances due to activity level also. Hence the production team cannot take action based on such variances.

From flexible budget performance report of Phone we observe that marketing/ sales team has done a better job since revenue has favorable variance of $7,000.The production team / purchase team may have to investigate the reason behind unfavorable variable cost variance. They can analyse and see whether the variance is due to material price,material usage, labor rate, labor efficiencies or variable overhead rate or  efficiencies. Once they analyze the find the actual reason, the responsibility can be fixed and actions taken to rectify the same.