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

Exercise 54

Generating a Flexible Budget Balmer Corporation’s master (static) budget for the year is shown below:

Sales (50,000 units)		$1,600,000
Cost of goods sold:
Direct materials	$150,000
Direct labor	450,000
Overhead (Variable overhead
applied at 40% of direct labor cost)	240,000	840,000
Gross profit		$ 760,000
Selling expenses:
Sales commissions (all variable)	$160,000
Rent (all fixed)	40,000
Insurance (all fixed)	30,000
General expenses:
Salaries (all fixed)	92,000
Rent (all fixed)	77,000
Depreciation (all fixed)	51,000	450,000
Opera ting income		$ 310,000

Required

1. During the year the company actually manufactured and sold 42,000 units of product. Prepare an Excel spreadsheet that contains a flexible budget for this level of output.

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2. Suppose, however, that the actual level of output had been 52,000 units of output. Rerun your spreadsheet to generate a flexible budget for this level of output.

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3. Of what relevance is the notion of “relevant range” when preparing pro forma budgets or a flexible budget for control purposes?

Step 1 of 6

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.