Question

John Richardson is the manufacturing production supervisor for Vernon Tool Works, a company that manufactures hand tools for mechanics. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife, “This is the dumbest place I've ever worked. Last year the company set up this budget assuming it would sell 254,000 units. Well, it sold only 244,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 254,000 units goal and it sells 264,000. The company's making all kinds of money. You'd think I'd get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if I'd stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I've ever worked." Vernon's master budget and the actual results for the most recent year of operating activity follow. Master Budget 254,000 $ 3,810,000 Actual Results 264,000 $ 4,065,600 Variances For U 10,000 $ 255,600 F Number of units Sales revenue Variable manufacturing costs Materials Labor Overhead Variable selling, general and administrative costs Contribution margin Fixed costs Manufacturing overhead Selling, general and administrative costs Net income (609,600) (317,500) (342,900) (482,600) 2,057,400 (631,600) (326,000) (360, 100) (508,600) 2,239, 300 22,000 8,500 17,200 26,000 181,900 (1,295,400) (477,520) $ 284,480 (1,293,400) (468,220) $ 477,680 2,000 9.300 $ 193,200 F Required c. Prepare a flexible budget and recompute the budget variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Answer 1

	Flexible Budget	Actual Result	Variance
Number of Units	$       2,64,000	$      2,64,000
Sales Revenue	$     39,60,000	$    40,65,600	$       1,05,600	F
Variable Manufacturing Costs
Material	$      -6,33,600	$     -6,31,600	$             2,000	F
Labor	$      -3,30,000	$     -3,26,000	$             4,000	F
Overhead	$      -3,56,400	$     -3,60,100	$             3,700	U
Variable Selling expenses	$      -5,01,600	$     -5,08,600	$             7,000	U
Contribution Margin	$     21,38,400	$    22,39,300	$       1,00,900	F
Fixed Costs
Manufacturing Overhead	$   -12,95,400	$ -12,93,400	$             2,000	F
Selling Expenses	$      -4,77,520	$     -4,68,220	$             9,300	F
Net Income	$       3,65,480	$      4,77,680	$       1,12,200	F