Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 22

Prepare Flexible Budget

Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:

	Actual (based on actual of 750,000 units)	Master Budget (based on budgeted 800,000 units)
Sales revenue	$6,210,000	$6,000,000
Less
Variable costs
Blank flash drives	1,800,000	1,800,000
Direct labor	345,000	420,000
Variable overhead	843,000	780,000
Variable marketing and administrative	585,000	600,000
Total variable costs	$3,573,000	$3,600,000
Contribution margin	$2,637,000	$2,400,000
Less
Fixed costs
Manufacturing overhead	1,236,000	1,200,000
Marketing	360,000	360,000
Administrative	255,000	225,000
Total fixed costs	$1,851,000	$1,785,000
Operating profits	$ 786,000	$ 615,000

Required

Prepare a flexible budget for Data-2-Go.

Step 1 of 2

Fundamentals of Variance Analysis; flexible budget

Before attempting to this question, the students should get well versed with the concepts of Flexible budget. Specially why this budget is prepared? What is its importance and how it helps in disclosing the inefficiencies and failures in achieving the desired objectives. Students should keep in mind that flexible budget is just the extrapolation of standard costs per unit to the desired volume. For example if we have standard cost of material for each unit of final output, then it can be applied to project the costs for any number of units produced. Idea behind this is that then this standard cost of actual output or sales (Flexible budget) is compared with the actual results to find out the variance or divergences. At the management level efforts are made to find out the causes of divergences. Based on this examination and conclusion, next year’s budget levels are fixed.

Details	Price per unit	Flexible budget based on 750,000 units
(A) Sales Revenue		$5,625,000
Less Variable costs of
Blank Flash Drive		$1,687,500
Direct Labour		$393,750
Variable Overhead		$731,250
Variable Marketing and Administrative		$562,500
(B) Total Variable Costs		$3375000
(C ) Contribution = A-B		$2250000
Less- Fixed costs
Manufacturing Overhead		$1,200,000
Marketing Overhead		$360,000
Administrative Overhead		$225,000
(D) Total Fixed Costs		$1,785,000
(E) Operating Profit		$465000

Explanation: We know that flexible budget is prepared for the actual activity level and standards costs and prices (which are taken into master budget) are taken into the calculation for the purpose of flexible budget. Here as given in the master budget, per unit cost and sale prices are calculated based on the figures given in the master budget. The calculation is shown here;

	Total Rev/ Cost at 800000 units	Total/Units (800000 units) = per unit	Units in Flexible budget	Units in flexible budget * per unit
A	B	D	E	F
Sales Revenue	$6,000,000	$7.50	$750,000	$5,625,000
Blank Flash Drive	$1,800,000	$2.25	$750,000	$1,687,500
Direct Labour	$420,000	$0.53	$750,000	$393,750
Variable Over head	$780,000	$0.98	$750,000	$731,250
Variable Marketing and Admin Expenses	$600,000	$0.75	$750,000	$562,500
total cost			$3,375,000