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# Chapter7 - CHAPTER 7 FLEXIBLE BUDGETS DIRECT-COST VARIANCES...

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CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL 7-16 (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) Sales-Volume 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 flexible-budget variance Total sales-volume variance \$20,000 U Total static-budget 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 static-budget variance in operating income is \$20,000 U. There is both an unfavorable total flexible-budget variance (\$12,800) and an unfavorable sales-volume variance (\$7,200). The unfavorable sales-volume variance arises solely because actual units manufactured and sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget 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. 7-1

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7-17 (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 flexible-budget 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 Flexible-budget variance Sales-volume variance \$48,000 F Static-budget 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 flexible-budget 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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Chapter7 - CHAPTER 7 FLEXIBLE BUDGETS DIRECT-COST VARIANCES...

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