Master Budgets, Flexible Budgets, and Profit-Variance Analysis As part of its comprehensive planning and control system, Menendez Company uses a master budget and subsequent variance analysis. You are given the following information that pertains to the company’s only product, XL-10, for the month of December.
Required
1. Using text Exhibit 14.4 as a guide, complete the missing parts of the following profit report for December.
| Actual Results | Flexible-Budget Variance | Flexible Budget | Sales Volume Variances | Master (Static) Budget |
Unit sales | 50,000 |
|
|
| 40,000 |
Sales | $450,000 |
|
|
| $400,000 |
Variable costs | 375,000 |
|
|
| 280,000 |
Contribution margin | $ 75,000 |
|
|
| $120,000 |
Fixed costs | 65,000 |
|
|
| 75,000 |
Operating income | $ 10,000 |
|
|
| $ 45,000 |
2. Based on your completed profit report, determine the dollar amount and label (F or U) each of the following variances for December:
a. Total master (static) budget variance.
b. Total flexible-budget variance.
c. Sales volume variance, in terms of operating income.
d. Sales volume variance, in terms of contribution margin.
e. Selling price variance.
3. Explain what is meant by the labels “favorable” and “unfavorable” in terms of a profit-variance report of the type you just prepared for the Menendez Company.
4. What information is contained in the total flexible-budget variance for the period? Include in your answer a short discussion of the component variances that can be calculated to explain the causes of the total flexible-budget variance.
5. Some individuals have recently criticized the use of standard costs and flexible budgets to perform the kinds of variance analyses covered in this chapter. Provide an overview of the arguments for and against the use of standard costs and flexible budgets for operational control purposes.
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