Exercise 8-3B a. Master Price / Cost Budget per Unit 18,000 Units $12 $216,000 $ 8 (144,000) 72,000 (20,000) (18,000) $ 34,000 b. Flexible Budget 19,000 Units $228,000 (152,000) 76,000 (20,000) (18,000) $ 38,000 Sales Variable manufacturing Contribution margin Fixed manufacturing Fixed selling and admin. Net income Exercise 8-4B Sales Variable manufacturing Contribution margin Fixed manufacturing Fixed selling and admin. Net income c. Master Budget 18,000 Units $216,000 (144,000) 72,000 (20,000) (18,000) $ 34,000 Flexible Budget 19,000 Units $228,000 (152,000) 76,000 (20,000) (18,000) $ 38,000 . & b. Activity Variances $12,000 F 8,000 U 4,000 F 0 0 $ 4,000 F Since the per unit sales price and per unit variable manufacturing costs are the same for both the master and flexible budgets, the activity variances are solely attributable to the fact that sales volume was 1,000 units more than planned.
The favorable $12,000 sales variance suggests that increased sales are beneficial. However, Irvin needs more information before drawing this conclusion. The increase in sales may have resulted from reducing the actual sales price which could produce negative consequences.
The unfavorable $8,000 variable manufacturing cost variance is misleading. The total amount of variable cost is expected to increase when volume increases. This variance is expected and not a bad thing.
Upper-level marketing managers are normally responsible for the sales volume variances. d. The fixed costs in both the master and flexible budgets are estimates. Total fixed costs are assumed to be constant regardless of the volume of production and sales. Therefore, no variance between the master and flexible budgets is expected for fixed costs. . Master Budget $20,000 18,000 $38,000 18,000 $2. 11 Flexible Budget $20,000 18,000 $38,000 19,000 $2. 00 Fixed manufacturing Fixed selling and admin. Total fixed cost (a) Units (b) Cost per unit (a ? b) The increase in sales volume reduces the fixed cost per unit, thereby increasing profitability. If the company uses a cost-plus pricing strategy, overstating cost per unit (underestimating volume) could result in overpricing the company’s product. The company could lose market share to competitors who offer lower prices.
Exercise 8-5B Actual Price / Cost at 19,000 Units $226,1001 (151,050)2 75,050 (21,000) (17,300) $ 36,750 a. & b. Flexible Budget Variances $1,900 U 950 F 950 U 1,000 U 700 F $1,250 U Sales Variable manufacturing Contribution margin Fixed manufacturing Fixed selling and admin. Net income 1 2 Flexible Budget 19,000 Units $228,000 (152,000) 76,000 (20,000) (18,000) $ 38,000 Actual sales: $11. 90 x 19,000 units = $226,100 Actual variable cost: $7. 95 x 19,000 units = $151,050 c. The unfavorable flexible budget sales variance results from actually selling products below the planned price.
To properly interpret this result, Irvin must also consider the sales volume variance. As shown in Exercise 8-4B, the sales volume variance was $12,000 favorable. A rational explanation for the two variances is that management sought to increase sales volume by reducing the sales price. The strategy succeeded because the reduction in sales dollars caused by selling products at a lower price ($1,900 unfavorable flexible budget variance) was more than offset by the increase in sales volume ($12,000 favorable sales volume variance) and total contribution margin increased.
The variable manufacturing cost variance ($950 favorable) is normally the responsibility of the purchasing agent or production supervisor. The variance suggests that either the purchasing agent paid less than planned or that employees used less than the planned amount of resources. The fixed manufacturing cost variance indicates that the company spent more than planned for those resources. The favorable fixed selling and administrative cost variance indicates that the company spent less than planned for those fixed costs. A variety of managers may be responsible for fixed cost variances.
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