Flexible Budget and Operating-Income Variances RTI Company’s master budget calls

ID: 1199971 • Letter: F

Question

Flexible Budget and Operating-Income Variances
RTI Company’s master budget calls for production and sale of 18,000 units for $81,000; variable costs of $30,600; and fixed costs of $20,000. During the most recent period, the company incurred $32,000 of variable costs to produce and sell 20,000 units for $85,000. During this same period, the company earned $25,000 of operating income.

Required Answers (please exmplain the math used)

1. Determine the following for RTI Company:
   a. Flexible-budget operating income.
   b. Flexible-budget variance, in terms of contribution margin.
   c. Flexible-budget variance, in terms of operating income.
   d. Sales volume variance, in terms of contribution margin.
   e. Sales volume variance, in terms of operating income.

2. Explain why the contribution margin sales volume variance and the operating income sales volume variance for the same period are likely to be identical.

3. Explain why the contribution margin flexible-budget variance is likely to differ from the operating income flexible-budget variance for the same period.

Explanation / Answer

1.Master budget data:

Selling price/unit =$4.50

Variable cost/unit =$1.70

Flexible budget for 20,000 units:

Sales $90,000

VC $34,000C

M $56,000

FC $20,000

Operating Income $36,000

Contribution margin FB variance = actual CM – flexible budget contribution margin

= $53,000 $56,000

= $3,000 Unfavorable

Operation income FB variance = actual operation income – FB operation income

= $25,000 $36,000

= $11,000 Unfavorable

Sales volume variance, in terms of contribution margin = FB contribution margin – master budget contribution margin

= $56,000 $50,400

= $5,600 Favorable

Sales volume variance, in terms of contribution margin = FB contribution margin – master budget operating income

= $36,000 $30,400

= $5,600 Favorable

FB Variance

Flexible Budget (FB)

Sales Volume

Variance Master Budget

Unit sales

Sales revenue

Variable cost

Contribution margin

Fixed costs

2. As long as both the budgeted and the actual operation are within the "relevant range," the flexible budget for the actual operating level and for the master budget will have the same total fixed costs. Since both flexible budget and master budget subtracted the same total fixed costs from contribution margin to arrive at operating income, the sales volume variance determined in terms of contribution margin and in terms of operating income will be identical.

3. The actual fixed costs for a period are likely to differ from the budgeted amount. As a result, the contribution margin FB variance is likely to differ from the operating income FB variance. This difference is equal to the total FB fixed cost variance for the period.