Question

Comparison of Actual and Budgeted Operating Income EXHIBIT 14.1 SCHMIDT MACHINERY COMPANY Analysis of Operating Income For October 2019 (1) (2) (3) Variances Actual Operating Income Master (Static) Budget 220U Units 780 1,000 $ 160,400U 100% $639,600 100% Sales $800,000 Variable costs 99.050F 350,950 55 450.000 56 $350,000 Contribution margin $288,650 45% 44% $ 61,350U 150.000 *** 160.650 Fixed costs 25 19 10.650U $128,000 20% $ Operating income $200,000 25% 72,000U *U denotes an unfavorable effect on operating income. *F denotes a favorable effect on operating income. ***Actual fixed factory overhead cost = $130,650; actual fixed selling and administrative costs = $30,000. Budgeted fixed factory overhead cost = $120,000; budgeted fixed selling and administrative costs = $30,000

Answer 1

1	Flexible Budget
	Units	920
	Sales	736,000
	variable costs	(412,160)
	Contribution margin	323,840
	Fixed costs	(150,000)
	Operating income	173,840
2
(a)	Sales volume variance(operating income) = SQ*SP-AQ*SP
			= 1000*800-920*800
			= 64,000 (Unfavourable)
(b)	Standard margin = 800-448=352
	Sales volume variance(Contribution variance) = SQ*SP-AQ*SP
				= 1000*352-920*352
				= 28,160 (Unfavorable)
3		Flexible Budget	Actual
	Units	920	920
	Sales	736,000	662,400
	variable costs	(412,160)	(515,200)
	Contribution margin	323,840	147,200
	Fixed costs	(150,000)	(180,700)
	Operating income	173,840	(33,500)	207,340
(a)	Total flexible budget variance = 1,73,840 - (-33,500) = 2,07,340 (U)
(b)	Total Variable cost flexible budget variance = 412,160-515,200 = 103,040 (U)
(c )	Total Fixed cost flexible budget variance = 1,50,000 - 1,80,700 = 30,700 (U)
(d)	Selling price variance = AQ*SP-AQ*AP = 920*800-920*720 = 73,600 (U)