Question

Assume no beginning or ending inventory (they will produce the products in the same month that they sell them). Ignore taxes. Use contribution margin income statement formatting.

LiveColor is preparing their 2019 budget. They estimate sales/production will be between 700,000 and 900,000 boxes of markers per month. LiveColor wants to look at both static budgets and flexible budgets to determine which is best for them. They have struggled in the past with determining whether budget variances were related to volume being above or below budget vs whether they are spending too much or too little on expenses. They want to be able to understand their budget variances in order to make better decisions.

Monthly Budget Data:

selling price per unit = 5.00/box

raw materials costs = 1.50/box

packaging costs = 0.80/box

salary and wages costs = 300,000/month

OT for production over 800,000 units = 0.70/box

fringe benefits = 50% of wages and OT

electricity= 0.20/box

waste and other costs = 0.10/box

rent costs = 500,000/month

insurance costs = 60,000/month

depreciation costs = 240,000/month

Note: Treat Salary and Wages Costs as Fixed Expenses.

1. Show the static budget based on 800,000 units (boxes) produced.
2. Show what the flexible budget would be if 700,000 units (boxes) were produced.
3. Show what the flexible budget would be if 900,000 units (boxes) were produced.
4. Show the flexible budget cost formula(s) for LiveColor.
5. Explain the difference between static and flexible budgets and when each should be used.

Answer 1