CHAPTER 7
FLEXIBLE BUDGETS, DIRECTCOST VARIANCES,
AND MANAGEMENT CONTROL
716
(20–30 min.)
Flexible budget.
Variance Analysis for Brabham Enterprises for August 2009
Actual
Results
(1)
Flexible
Budget
Variances
(2) = (1) – (3)
Flexible
Budget
(3)
SalesVolume
Variances
(4) = (3) – (5)
Static
Budget
(5)
Units (tires) sold
2,800
g
0
2,800
200
U
3,000
g
Revenues
$313,600
a
$
5,600 F
$308,000
b
$22,000 U
$330,000
c
Variable costs
229,600
d
22,400
U
207,200
e
14,800
F
222,000
f
Contribution margin
84,000
16,800 U
100,800
7,200 U
108,000
Fixed costs
50,000
g
4,000
F
54,000
g
0
54,000
g
Operating income
$
34,000
$12,800
U
$
46,800
$
7,200
U
$
54,000
$12,800 U
$
7,200 U
Total flexiblebudget variance
Total salesvolume variance
$20,000 U
Total staticbudget variance
a
$112 × 2,800 = $313,600
b
$110 × 2,800 = $308,000
c
$110 × 3,000 = $330,000
d
Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e
$74 × 2,800 = $207,200
f
$74 × 3,000 = $222,000
g
Given
2.
The key information items are:
Actual
Budgeted
Units
Unit selling price
Unit variable cost
Fixed costs
2,800
$
112
$
82
$50,000
3,000
$
110
$
74
$54,000
The total staticbudget variance in operating income is $20,000 U. There is both an unfavorable
total flexiblebudget variance ($12,800) and an unfavorable salesvolume variance ($7,200).
The unfavorable salesvolume variance arises solely because actual units manufactured
and sold were 200 less than the budgeted 3,000 units. The unfavorable flexiblebudget variance
of $12,800 in operating income is due primarily to the $8 increase in unit variable costs. This
increase in unit variable costs is only partially offset by the $2 increase in unit selling price and
the $4,000 decrease in fixed costs.
71
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(15 min.)
Flexible budget.
The existing performance report is a Level 1 analysis, based on a static budget. It makes no
adjustment for changes in output levels. The budgeted output level is 10,000 units––direct
materials of $400,000 in the static budget ÷ budgeted direct materials cost per attaché case of
$40.
The following is a Level 2 analysis that presents a flexiblebudget variance and a sales
volume variance of each direct cost category.
Variance Analysis for Connor Company
Actual
Results
(1)
Flexible
Budget
Variances
(2) = (1) – (3)
Flexible
Budget
(3)
Sales
Volume
Variances
(4) = (3) – (5)
Static
Budget
(5)
Output units
Direct materials
Direct manufacturing labor
Direct marketing labor
Total direct costs
8,800
$364,000
78,000
110,000
$552,000
0
$12,000 U
7,600 U
4,400
U
$24,000
U
8,800
$352,000
70,400
105,600
$528,000
1,200
U
$48,000 F
9,600 F
14,400
F
$72,000
F
10,000
$400,000
80,000
120,000
$600,000
$24,000 U
$72,000 F
Flexiblebudget variance
Salesvolume variance
$48,000 F
Staticbudget variance
The Level 1 analysis shows total direct costs have a $48,000 favorable variance.
However, the Level 2 analysis reveals that this favorable variance is due to the reduction in
output of 1,200 units from the budgeted 10,000 units. Once this reduction in output is taken into
account (via a flexible budget), the flexiblebudget variance shows each direct cost category to
have an unfavorable variance indicating less efficient use of each direct cost item than was
budgeted, or the use of more costly direct cost items than was budgeted, or both.
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 Spring '10
 maik
 Variance, Direct material price variance, FlexibleBudget Variances

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