CPAPrepChapter7 - CHAPTER 7 FLEXIBLE BUDGETS DIRECT-COST...

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CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL 7.2 Two sources of information about budgeted amounts are (a) past amounts and (b) detailed engineering studies. 7-6 The steps in developing a flexible budget are: Step 1: Identify the actual quantity of output. Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output. Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs. 7-7 Four reasons for using standard costs are: (i) cost management, (ii) pricing decisions, (iii) budgetary planning and control, and (iv) financial statement preparation. 7.13 Variances can be calculated at the activity level as well as at the company level. For example, a price variance and an efficiency variance can be computed for an activity area. 1
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7-20 (30-40 min.) Flexible budget and sales volume variances. 1. and 2. Performance Report for Marron, Inc., June 2009 Actual Flexible Budget Variances Flexible Budget Sales Volume Variances Static Budget Static Budget Variance Static Budget Variance as % of Static Budget (1) (2) = (1) – (3) (3) (4) = (3) – (5) (5) (6) = (1) – (5) (7) = (6) H (5) Units (pounds) 525,000 - 525,000 25,000 F 500,000 25,000 F 5.0% Revenues $3,360,000 $ 52,500 U $3,412,500 a $162,500 F $3,250,000 $110,000 F 3.4% Variable mfg. costs 1,890,000 52,500 U 1,837,500 b 87,500 U 1,750,000 140,000 U 8.0% Contribution margin $1,470,000 $105,000 U $1,575,000 $ 75,000 F $1,500,000 $ 30,000 U 2.0% $105,000 U $ 75,000 F Flexible-budget variance Sales-volume variance $30,000 U Static-budget variance a Budgeted selling price = $3,250,000 w500,000 lbs = $6.50 per lb. Flexible-budget revenues = $6.50 per lb. w 525,000 lbs. = $3,412,500 b Budgeted variable mfg. cost per unit = $1,750,000 w500,000 lbs. = $3.50 Flexible-budget variable mfg. costs = $3.50 per lb. w 525,000 lbs. = $1,837,500 2
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3. The selling price variance, caused solely by the difference in actual and budgeted selling price, is the flexible-budget variance in revenues = $52,500 U. 4. The flexible-budget variances show that for the actual sales volume of 525,000 pounds, selling prices were lower and costs per pound were higher. The favorable sales volume variance in revenues (because more pounds of ice cream were sold than budgeted) helped offset the unfavorable variable cost variance and shored up the results in June 2009. Levine should be more concerned because the small static-budget variance in contribution margin of $30,000 U is actually made up of a favorable sales-volume variance in contribution margin of $75,000, an unfavorable selling-price variance of $52,500 and an unfavorable variable manufacturing costs variance of $52,500. Levine should analyze why each of these variances occurred and the relationships among them. Could the efficiency of variable manufacturing costs be improved? Did the sales volume increase because of a decrease in selling price or because of growth in the
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CPAPrepChapter7 - CHAPTER 7 FLEXIBLE BUDGETS DIRECT-COST...

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