Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 66

Master Budgets, Flexible Budgets, and Profit-Variance Analysis The Ono Tuna Company uses flexible budgets at the end of each period to evaluate the financial performance of each operating unit. As the accountant in charge, you have been asked to explain to management why actual results during the past year differed from the results contained in the master budget that was prepared before the start of the year.

Required

1. Using text Exhibit 14.4 as a guide, fill in the missing amounts and labels. (Note: A and B are labels.)

	Actual		Flexible		Master
	Results	A?	Budget	B?	Budget
Units	205,000	C?	D?	E?	200,000
Sales revenues	$2,255,000	F?	$2,203,750	G?	H?
Variable costs	J?	$6,000U	I?	K?	$660,000
Fixed costs	$170,000	L?	$180,000	M?	N?
Operating income	O?	P?	Q?	R?	S?

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2. What was the total master (static) budget variance for the period? How much of this variance was attributable to sales volume for the period being different from planned? How much is attributable to a combination of selling price, variable cost per unit, and spending on fixed costs being different from plans?

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3. A production manager who is attending your presentation asks about the total flexible-budget variable cost variance of $6,000 (U) that was incurred during the past year. Explain how this variance might be further analyzed to provide managerial insight. Assume, for this problem, that there are only three variable costs for the company: direct materials, direct labor, and variable selling/administrative expenses.

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4. What nonfinancial performance indicators might be appropriate in this context as part of a comprehensive performance-evaluation system?

Step 1 of 7

Variance and budget v/s variance:

In costing, variance is a difference occurred between planned, standard or budgeted cost and the actual cost incurred. These variances can be for both cost and revenue. These variances can be favourable or unfavourable.