Question

The following information is available for Brownstone Products Company for the month of July: Units Sales revenue Variable manufacturing costs Fixed manufacturing costs Variable selling and administrative expenses Fixed selling and administrative expenses Master Actual Budget 3,900 3,200 $55,800 $60,000 10,900 16,000 12,800 13,800 7,400 8,000 8,800 10,450 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. 3,940 units. b. 4,340 units.

Answer 1

Requirement 1:

$4,150 Unfavorable

Calculations:

	i	ii	iii=i-ii
	Actual	Master	Variance	Fav/Unfav
Units	3,900	3,200
Sales revenue	$55,800	$60,000
Variable costs:
Manufacturing	($10,900)	($16,000)
Selling and administrative	($7,400)	($8,000)
Contribution margin	$37,500	$36,000
Fixed Costs:
Manufacturing	($12,800)	($13,800)
Selling and administrative	($8,800)	($10,450)
Operating income	$15,900	$11,750	$4,150	Unfavorable

Requirement 2:

	Flexible-budget Variance		Sales volume Variance
Contribution margin	$6,375	U	$7,875	F
Operating income	$1,580	F	$2,570	F

Calculations:

Flexible budget:

	i	ii=i/3,200	iii=3,900 x ii
	Master	Per	Flexible
	Budget	Unit	Budget
Units	3,200		3,900
Sales revenue	$60,000	$18.75	$73,125
Variable costs:
Manufacturing	($16,000)	($5.00)	($19,500)
Selling and administrative	($8,000)	($2.50)	($9,750)
Contribution margin	$36,000	$11.25	$43,875
Fixed Costs:
Manufacturing	($13,800)	($4.31)	($16,819)
Selling and administrative	($10,450)	($3.27)	($12,736)
Operating income	$11,750	$3.67	$14,320

Variance:

		Flexible-budget	Flexible	Sales volume	Master
	Actual	Variance	Budget	Variance	Budget
Units	3,900		3,900		3,200
Sales revenue	$55,800	=	$73,125		$60,000
Variable costs:
Manufacturing	($10,900)		($19,500)		($16,000)
Selling and administrative	($7,400)		($9,750)		($8,000)
Contribution margin	$37,500	$6,375 U	$43,875	$7,875 F	$36,000
Fixed Costs:
Manufacturing	($12,800)		($16,819)		($13,800)
Selling and administrative	($8,800)		($12,736)		($10,450)
Operating income	$15,900	$1,580 F	$14,320	$2,570 F	$11,750

Actual - Flexible budget = Flexible budget variance, If actual is more Favorable other wise Unfavorable

Flexible budget - Master budget = Sales volume variance, If flexible budget is more favorable other wise Unfavorable

Requirement 3:

	Flexible a.	Flexible b.	Master
Units	3,940	4,340	3,200
Sales revenue	$73,875	$81,375	$60,000
Variable costs:
Manufacturing	$19,700	$21,700	$16,000
Selling and administrative	$9,850	$10,850	$8,000
Total variable costs	$29,550	$32,550	$24,000
Contribution margin	$44,325	$48,825	$36,000
Fixed Costs:
Manufacturing	$16,991	$18,716	$13,800
Selling and administrative	$12,867	$14,173	$10,450
Total fixed costs	$29,858	$32,889	$24,250
Operating income	$14,467	$15,936	$11,750

Calculations:

	i	ii	iii=3,940xii	iv=4,340xii
	Master	Per	Flexible a.	Flexible b.
Units	3,200	Unit (i/3,200)	3,940	4,340
Sales revenue	$60,000	$18.75	$73,875	$81,375
Variable costs:
Manufacturing	$16,000	$5.00	$19,700	$21,700
Selling and administrative	$8,000	$2.50	$9,850	$10,850
Total variable costs	$24,000	$7.50	$29,550	$32,550
Contribution margin	$36,000	$11.25	$44,325	$48,825
Fixed Costs:
Manufacturing	$13,800	$4.31	$16,991	$18,716
Selling and administrative	$10,450	$3.27	$12,867	$14,173
Total fixed costs	$24,250	$7.58	$29,858	$32,889
Operating income	$11,750	$3.67	$14,467	$15,936