Question

Problem Company prepared the following budget for the year based on 1,000 units sold: Variable costs 450,000 Contribution margin 300,000 Fixed costs 200,000 Operating income 100,000 Actual results for the year were : Units sold 950 Sales $703,000 Variable costs 432,250 Contribution margin 270,750 Fixed costs 185,000 Operating income 5, 750 Required: prepare a static and flexible budget for the year. Prepare a budget for the next year with 1,100 units sols and a 10% increase in fixed costs

Answer 1

Solution to part (1)

Static and flexible budget for the year :

	Actual	Revenue and Cost variances	Flexible Budget	Activity Variances	Static Budget
Units	950	0	950	(50)	1,000
Sales	703,000	($ 9500)	712,500	($37,500)	750,000
Variable costs	432,250	($ 4750)	427,500	22,500	450,000
Contribution Margin	270,750	($14,250)	285,000	(15,000)	300,000
Fixed Costs	185,000	15,000	200,000	0	200,000
Operating Income	85,750	750	85,000	(15,000)	100,000

Revenue and cost variances are difference between Flexible budget and actual figures

Activity variances are difference between Flexible Budget and Static Budget.

Workings for flexible budget:

1)Sales = Budgeted price x units sold

= (Budgeted sales / Budgeted Units) x Units sold

= (750,000 / 1,000) x 950

= $750 x 950

= $ 712,500

2) Variable costs = Budgeted rate x units sold

= (Budgeted variable costs / Budgeted Units) x Units sold

= (450,000 / 1,000) x 950

= $450 x 950

= $ 427,500

3) Fixed costs does not change with output hence remains same.

Solution to part (2)

Planning Budget for next year with 1,100 units sold and 10% increase in fixed costs.

	Revenue and cost formula		Planning Budget
	Variable	Fixed
Units			1,100
Sales	$750		$825,000
Variable costs	$450		495,000
Contribution margin	300		330,000
Fixed Costs		$220,000	220,000
Operating Income			$110,000

We take out the budgeted sales price and budgeted variable cost rate from the previous part.

Fixed costs = 200,000 x 110%

= $220,000