Question

beach Color is preparing their 2019 budget. They estimate sales/production will be between 600,000 and 800,000 boxes of markers per month. Beach Color 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. Note: Treat Salary and Wages Costs as Fixed Expenses.

Question 1: Prepare some budgets in Excel for Beach Color. (20 points)

a) Show the static budget based on 700,000 units (boxes) produced.

b) Show what the flexible budget would be if 600,000 units (boxes) were produced.

c) Show what the flexible budget would be if 800,000 units (boxes) were produced.

d) Show the flexible budget cost formula(s) for Beach Color. e) Explain the difference between static and flexible budgets and when each should be used.

Question 2: The month of January 2019 is complete, and Beach Color wants to compare their budget to their actual results. Actual results are shown in the table above. (30 points)

a) Compare January’s actual results to the static budget you created in Question 1a. Analyze the static budget variances by comparing the static budget to the actual results.

b) Break out price and volume variance amounts for each line item.

c) For the static budget variances, indicate whether each line item is favorable or unfavorable. Provide possible explanations.

d) Create the flexible budget based on the actual units produced for January.

e) Compare the actual results to the flexible budget for January that you created in Question 2d. Analyze the flexible budget variances by comparing the flexible budget to the actual results.

f) For the flexible budget variances, indicate whether each line item is favorable or unfavorable. Provide possible explanations.

g) Beach Color wants to determine whether they should use a flexible budget or a static budget going forward. Write a memo to their CFO explaining some pros and cons of each option. Provide a recommendation including the reason(s) you recommend that approach.

Monthly Budget

Selling Price per unit-----5.00 per box

Raw material cost-----1.50 per box

Packaging Cost----.80 per box

salary and wage cost----300,000 per month

ot for product over 800,000 units---0.70 per box

fringe benefits-----50% off wage and OT

electricity---.20 per box

waste and other cost---.10 per box

rent cost---500,000 per month

insurance cost----60,000 per month

depreciation cost---240,000 per month

Question 2 chart

Production---825,000 per box

Sales---4,070,000

Ingredients cost---1,132,450

packaging cost---658,250

salary and wage cost---280,000

OT---48,750

Fringe benefits---164,375

electricity---158,780

waste and other cost--138,352

rent cost---500,000

insurance cost--65,000

depreciation cost---240,000

Answer 1

1		a	b	c
		Static budget	Flexible Budget	Flexible Budget
	No of units sale	7,00,000	6,00,000	8,00,000
	Sele Revenue	3500000	3000000	4000000
	Raw material cost	1050000	900000	1200000
	Packing cost	5,60,000	4,80,000	6,40,000
	Electricity	140000	120000	160000
	Waste and other cost	70000	60000	80000
	Fring benefit	35000	30000	40000
	Total Direct cost	1855000	1590000	2120000
	Gross profit	1645000	1410000	1880000
	Salaries and wages	300000	2,25,000	300000
	Rent Cost	500000	3,75,000	500000
	Insurance cost	60000	45,000	60000
	Depreciation cost	240000	1,80,000	240000
	Total Fixed cost	1100000	825000	1100000
	Net profit	545000	585000	780000
1 d	1. The budget, which remains constant, regardless of the actual output levels is known as Fixed Budget. The flexible budget is a budget which can be easily adjusted according to the output levels.
	2. Fixed Budget is static in nature while Flexible Budget is dynamic.
	3. Fixed Budget operates in only one activity level, but Flexible Budget can be operated on multiple levels of output.
	4. Fixed Budget is based on the assumption, whereas Flexible Budget is realistic.
	5. Fixed Budget is inelastic, as it cannot be re-casted as per the actual output. Conversely, the Flexible budget is elastic because it can be easily adjusted according to the volume of the production.
	6. Flexible Budget proves more accurate to evaluate the performance, capacity and efficiency of the activity level compared to Fixed Budget.
2
		Static budget	Actual
				Variable
	No of units sale	7,00,000	8,25,000	1,25,000
	Sele Revenue	35,00,000	40,70,000	5,70,000
	Raw material cost	10,50,000	11,32,450	-82,450
	Packing cost	5,60,000	6,58,250	-98,250
	Electricity	1,40,000	1,58,780	-18,780
	Waste and other cost	70,000	1,87,102	-1,17,102
	Fring benefit	35,000	1,64,375	-1,29,375
	Ot for over production	4,90,000
	Total Direct cost	23,45,000	23,00,957	-4,45,957
	Gross profit	11,55,000	17,69,043	6,14,043
	Salaries and wages	3,00,000	2,80,000	20,000
	Rent Cost	5,00,000	5,00,000	-
	Insurance cost	60,000	65,000	-5,000
	Depreciation cost	2,40,000	2,40,000	-
	Total Fixed cost	11,00,000	10,85,000	15,000
	Net profit	55,000	6,84,043	5,99,043