Question

The Groton Company produces engine parts for car manufacturers. A new accountant intern at Groton has accidentally deleted the calculations on the company's variance analysis calculations for the year ended December 31, 2017. The following table is what remains of the data.

Answer 1

1		Actual Budget	Flexible-budget variances	Flexible Budget	Sales-Volume Variance	Static Budget
	Units sold	$            1,03,000.00	$                       -	$ 1,03,000.00	11000 U	$    92,000.00
	Revenue (sales)	$            6,95,250.00	272950 F	$ 4,22,300.00	45100 U	$ 3,77,200.00
	Variable costs	$            4,55,000.00	238700 U	$ 2,16,300.00	23100 U	$ 1,93,200.00
	Contribution Margin	$            2,40,250.00	34250. F	$ 2,06,000.00	22000 U	$ 1,84,000.00
	Fixed Costs	$            1,51,250.00	56250 U	$      95,000.00	$                                           -	$    95,000.00
	Operating Income	$               89,000.00	22000 U	$ 1,11,000.00	22000 F	$    89,000.00
	where, F= Favourable
	and ,U =Unfavourable

2	Calculation of actual and budgeted Selling price
	Actual Selling price =	Revenue/ Units sold
		=695250/103000
		$                         6.75
	Budgeted Selling Price =	Budgeted Revenue/Budgeted Units
		=377200/92000
		$                         4.10
	Calculation of actual and budgeted Variable cost per unit
	Actual Variable cost per unit =	Total variable cost/ Units sold
		=455000/103000
		$                         4.42
	Budgeted Variable cost per unit =	Budgeted variable cost/ Budgeted Units
		=193200/92000
		$                         2.10

3. Actual Variable costs has Increased by 110%(approx) which has resulted in unfavourable "Flexible-budget variable cost variance" . This variance could be a result of increase in the prices of raw material being used.

Gordon was able to pass most of the change in price of raw material by increasing the selling price per unit from $4.42 to $6.75 covering the  "Flexible-budget variable cost variance".

Moreover , Increase in the number of sales units from the budgeted ones contributed to more favourable results.

It can be seen that fixed costs have been also increased considerably , the reason of which needs to be looked into.

The important lesson learned here is:

The company have should kept buffered stocks or should have taken derivatives if the company 's raw materials price are being fluctuating this much, that would have resulted in minimizing the losses. Moreover increasing the prices can hamper the company's Image in long run so, it needs to be taken care of too.

More information is required on fixed costs , so that detailed analysis of it can be done and whereever possible the costs can be controlled