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

Exercise 72

Master Budget, Flexible Budget, and Profit-Variance Analysis Going into the period just ended, Ortiz&Co., manufacturer of a moderately priced espresso maker for retail sale, had planned to produce and sell 3,900 units at $100 per unit. Budgeted variable manufacturing costs per unit are $50. Ortiz pays its salespeople a 10 percent sales commission, which is the only variable nonmanufacturing cost for the company. Fixed costs are budgeted as follows: manufacturing, $50,000; marketing, $36,000.

Actual financial results for the period were disappointing. While sales volume was up (4,000 units sold), actual operating profit was only $20,000 for the period. Fixed manufacturing costs were as budgeted, but fixed marketing expenses exceeded budget by $4,000. Actual sales revenue for the period was $390,000, and actual variable costs were $70 per unit (the actual sales commission was 10 percent of sales revenue generated).

Required

1. Develop an Excel spreadsheet that is able to produce a profit-variance report similar to the one presented in text Exhibit 14.4.

---

2. Use the spreadsheet you developed in (1) and the data presented above to complete the profit-variance report for the period. Below the table you create, show separately the following variances:

?a. Total master (static) budget variance (i.e., the total operating-income variance for the period).

?b. Total flexible-budget variance.

?c. Flexible-budget variance for total variable costs, plus the flexible-budget variance for:

??(1) variable manufacturing costs.

??(2) variable nonmanufacturing costs.

?d. Flexible-budget variance for total fixed costs, plus the flexible-budget variance for:

??(1) fixed manufacturing costs.

??(2) fixed nonmanufacturing costs.

---

3. Provide a concise interpretation for each of the variances calculated above in (2).

---

4. Using the variances you calculated above in (2), prepare in as much detail as the data allow, a separate summary report similar to text Exhibit 14.2.

Step 1 of 3

1.  

	Actual Results	Flexible-Budget Variances	Flexible Budget	Sales Volume Variance	Master (Static) Budget
Unit sales	4,000	0	4,000	100F	3,900
Sales	$390,000	$10,000U	$400,000	$10,000F	$390,000
Variable Costs:
Manufacturing	$241,000	$41,000U	$200,000	$5,000U	$195,000
Marketing	$39,000	$1,000F	$40,000	$1,000U	$39,000
Total Variable Costs	$280,000	$40,000U	$240,000	$6,000U	$234,000
CM	$110,000	$50,000U	$160,000	$4,000F	$156,000
Fixed Costs:
Manufacturing	$50,000	$0	$50,000	$0	$50,000
Marketing	$40,000	$4,000U	$36,000	$0	$36,000
Total Fixed Costs	$90,000	$4,000U	$86,000	$0	$86,000
Operating Income	$20,000	$54,000U	$74,000	$4,000F	$70,000