Question

Outdoor Inc recorded the following flex budget and actual results during November 2019:

	Actual	Flex Budget	Flex Budget Variance	Percentage Variance
SALES	$215,000	$200,000
COGS	$ 90,000	$ 95,000
Gross Profit
Operating Expenses	$89,000	$81,000
EBIT Earnings Before Interest and Taxes
Interest Expense	$3,850	$3,450
Income Tax	$10,500	$10,500
Net Profit

1. Fill in the missing amounts in the table (Gross Profit, EBIT and Net Profit)
2. Calculate flex budget variance and percentage variance. Include ‘favourable F’ or ‘unfavourable U’ rating for each
3. What type of responsibility centre is shown above, for Outdoor Inc?
4. If management requires investigation of any variances greater than $8000 and exceeding 10%, which items will be investigated?

Answer 1

a and b)		Actual	Flex Budget	Flex Budget Variance (Actual-Flexbudget)	Percentage Variance	Favourable/Unfavourable)
	SALES	$215,000	$200,000	$15000	=(15000/200000) *100 = 7.5	Favourable
	COGS	$ 90,000	$ 95,000	$5000	=(5000)/95000) *100 = 5.3	Favourable
	Gross Profit (Sales - COGS)	$125000	$105000	$20000	=(20000/105000)*100=19	Favourable
	Operating Expenses	$89,000	$81,000	$8000	=(8000/81000)*100=9.9	Unfavourable
	EBIT Earnings Before Interest and Taxes (Gross Profit - Operating expenses)	$36000	$24000	$12000	=(12000/24000)*100 = 50	Favourable
	Interest Expense	$3,850	$3,450	$400	=(400/3450)*100 = 11.6	Favourable
	Income Tax	$10,500	$10,500	$0	0
	Net Profit (EBIT-Interest-Income tax)	$21650	$10050	$11600	=(11600/10050)*100 = 115.4	Favourable
c)	Profit centre
d)	Gross profit , EBIT, Interest expense, Net profit variances are more than 10 percent