Question

Edwards and Bell market a single line of home computer, dubbed the XL-98. The master budget for the coming year contained the following items: sales revenue, $404,000; variable costs, $252,000; fixed costs, $100,400. Actual results for the year were as follows: sales revenue, $352,000; variable costs, $225,400; fixed costs, $95,800. The flexible-budget operating income for the year was $35,400.

a.	What is the total static (master) budget variance in operating profit for the period?

       

b.	What portion of the total static (master) budget variance is attributable to actual sales volume being different from planned sales volume?

       

c.	What portion is due to a combination of selling price and costs (variable cost per unit and total fixed costs) being different from budgeted amounts?

      

Answer 1

Static Budget Operating Profit	51,600
Less: Actual Operating Profit	30,800
Total static (master) budget variance in operating profit (Answer A)	20,800	Unfavorable Variance
Portion of the total static (master) budget variance is attributable to actual sales volume being different from planned sales volume (Answer B)	16,200	Unfavorable Variance
Portion is due to a combination of selling price and costs (variable cost per unit and total fixed costs) being different from budgeted amounts (Answer C)	4,600	Unfavorable Variance

Edwards and Bell
Production department flexible performance report
For the year ended
	Actual result	Spending variance		Flexible budget	Activity (Volume) variance		Planning (Static) budget
Sales revenue	352,000	8,942	U	360,942	43,058	U	404,000
Total Variable cost (Less)	225,400	258	U	225,142	26,858	F	252,000
Contribution Margin	126,600	9,200	U	135,800	16,200	U	152,000
Total Fixed cost (Less)	95,800	4,600	F	100,400	-	None	100,400
Operating Profit	30,800	4,600	U	35,400	16,200	U	51,600
U means Unfavorable Variance
F means Favorable Variance
None means No variance
Hint:
Increase in revenue, Contribution margin , Operating Profit, operating income is Favorable event.
Decrease in revenue, Contribution margin , Operating Profit, operating income is Unfavorable event.
Increase in expense or cost is Unfavorable event.
Decrease in expense or cost is Favorable event.
How to calculate Increase ?
For Spending variance, Increase (decrease) =Actual result Less Flexible budget
For Activity (Volume) variance, Increase (decrease) = Flexible budget Less Planning (Static) budget

Flexible-budget operating income	$          35,400
Add: Total Fixed cost (As per Master budget)	$        100,400
Flexible-budget Contribution Margin	$        135,800
Flexible-budget Contribution Margin	$        135,800
Divided by: master-budget Contribution Margin	$        152,000
Percentage of Flexible-budget to Master-budget	89.342105%

Flexible budget
Sales revenue (404000*89.342105%)	360,942
Total Variable cost (252000*89.342105%)	225,142
Contribution Margin	135,800
Total Fixed cost	100,400
Operating Profit	35,400