Tutorial 8.docx - Tutorial 8 Budgetary Control and Variance...

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Tutorial 8: Budgetary Control and Variance Analysis In this tutorial, we will discuss three problems. The first problem is on the topic of calculating and interpreting sales variances. The second problem deals with computing materials and labor variances. The third problem is a comprehensive problem that deals with most aspects of variance analysis. In the first problem, you are given the necessary data from the master budget for the football operations for Midwestern University. According to the master budget, the expected average attendance will fill only 50% of seats in the stadium. There are 6 home games for the season and the average ticket price is budgeted at $25 per seat per game. The budgeted variable cost per seat per game is $5. The budgeted fixed costs for the season are $2 million. The athletic director decides to reduce the average ticket price from $25 to $19 and that decision increases the average attendance by 15,000 per game. The actual results are shown in this table. You have three parts in this problem. You need to calculate the total profit variance and split that into sales volume variance and sales price variance. The total profit variance is the difference between actual profits and the budgeted profits in the master budget. Let us first construct the master budget based on the data. Given that the budgeted ticket sales for each game is 15,000 seats, for the whole season of 6 games, 156,000 tickets are budgeted to be sold. At the standard price of $25 per ticket, this corresponds to a revenue of 156,000 x $25 = $3.9 million dollars. Given the standard variable cost of $5 per seat per game, the budgeted variable costs = 156,000 x 5 = $780,000. This will give the budgeted contribution margin of $3.12 million. If we subtract the budgeted fixed costs of $2 million, we get the budgeted profit as $1.12 million. Now, let us calculate the actual results for each of the line items in the master budget. For example, the actual ticket sales exceeded the budgeted ticket sales by 15,000 and therefore, each game generated ticket sales of 41,000. For the six games, the total ticket sales equal 6 x 41,000 = 246,000. At the average price of $19 per ticket, this corresponds to revenue of $4.674 million. Variable costs equal $1.23 million @ $ 5 per seat. Actual fixed costs turned out to be equal to the budgeted fixed costs of $2 million. This implies that the actual profits were $1.444 million. Total profit variance for the Midwestern University’s football operations is $1.444 - $1.12 million = $324 million. This is favorable variance since the actual profits exceeded the budgeted profits. Now, construct a flexible budget for the football operations. Flexible budget is constructed based on the actual activity level but using budget standards. Start the flexible budget with the actual activity. i.e. the actual ticket sales which is 246,000 tickets for all the six home games. Given that the standard ticket price in the budget is $25 per seat, the flexible budget for revenue equals $6.15 million.

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