Exercise 22-5 Fallon Company uses flexible budgets to control its selling expens

ID: 2403501 • Letter: E

Question

Exercise 22-5

Fallon Company uses flexible budgets to control its selling expenses. Monthly sales are expected to range from $172,100 to $205,400. Variable costs and their percentage relationship to sales are sales commissions 6%, advertising 6%, traveling 3%, and delivery 2%. Fixed selling expenses will consist of sales salaries $35,400, depreciation on delivery equipment $6,500, and insurance on delivery equipment $1,200.

Prepare a monthly flexible budget for each $11,100 increment of sales within the relevant range for the year ending December 31, 2017. (List variable costs before fixed costs.)

FALLON COMPANY
Monthly Selling Expense Flexible Budget
For the Year 2017

Problem 22-3A (Part Level Submission)

RATCHET COMPANY
Budget Report
Assembling Department
For the Month Ended August 31, 2017

Difference

Manufacturing Costs

Budget

Actual

Favorable
Unfavorable
Neither Favorable
nor Unfavorable

$51,200

$50,200

$1,000

57,600

54,200

3,400

26,880

26,980

100

19,200

18,740

460

16,000

15,830

170

11,520

11,780

260

182,400

177,730

4,670

11,200

–0–

18,300

–0–

7,400

–0–

36,900

–0–

$219,300

$214,630

$4,670

(a) & (b)

RATCHET COMPANY
Assembling Department
Flexible Budget Report
For the Month Ended August 31, 2017

Difference

Budget

Actual Costs

Favorable
Unfavorable
Neither Favorable
nor Unfavorable

Exercise 22-10

Chubbs Inc.’s manufacturing overhead budget for the first quarter of 2017 contained the following data.

Variable Costs

Fixed Costs

Actual variable costs were indirect materials $15,300, indirect labor $9,500, utilities $9,000, and maintenance $4,500. Actual fixed costs equaled budgeted costs except for property taxes and insurance, which were $9,200. The actual activity level equaled the budgeted level.

All costs are considered controllable by the production department manager except for depreciation, and property taxes and insurance.

(a) Prepare a manufacturing overhead flexible budget report for the first quarter. (List variable costs before fixed costs.)

CHUBBS INC.
Manufacturing Overhead Flexible Budget Report
For the Quarter Ended March 31, 2017

Difference

Budget

Actual

Favorable
Unfavorable
Neither Favorable
nor Unfavorable

(b) Prepare a responsibility report for the first quarter.

CHUBBS INC.
Manufacturing Overhead Responsibility Report
For the Quarter Ended March 31, 2017

Difference

Controllable Costs

Budget

Actual

Favorable
Unfavorable
Neither Favorable
nor Unfavorable

Exercise 22-15 (Part Level Submission)

Horatio Inc. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows.

(a)

Operating Data

Women’s Shoes

Men’s Shoes

Children’s Shoes

$312,120

$208,080

115,600

104,040

109,820

693,600

520,200

289,000

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Problem 22-5A (Part Level Submission)

Actual

Comparison with Budget

(a)

OPTIMUS COMPANY
Home Division
Responsibility Report
For the Year Ended December 31, 2017

Difference

Budget

Actual

Favorable
Unfavorable
Neither Favorable
nor Unfavorable

Open Show Work

FALLON COMPANY
Monthly Selling Expense Flexible Budget
For the Year 2017

AdvertisingActivity LevelDepreciationDeliveryFixed ExpensesInsuranceSalesSales CommissionsSales SalariesTotal ExpensesTotal Fixed ExpensesTotal Variable ExpensesTravelingVariable Expenses

Explanation / Answer

he flexible budget uses the same selling price and cost assumptions as the original budget. Variable and fixed costs do not change categories. The variable amounts are recalculated using the actual level of activity, which in the case of the income statement is sales units. Each flexible budget line will be discussed separately.

Sales. The original budget assumed 17,000 Pickup Trucks would be sold at $15 each. To prepare the flexible budget, the units will change to 17,500 trucks, and the actual sales level and the selling price will remain the same. The $262,500 is 17,500 trucks times $15 per truck. The variance that exists now is simply due to price. Given that the variance is unfavorable, management knows the trucks were sold at a price below the $15 budgeted selling price.

Cost of Goods Sold. Using the cost data from the budgeted income statement, the expected total cost to produce one truck was $11.25. The flexible budget cost of goods sold of $196,875 is $11.25 per pick up truck times the 17,500 trucks sold. The lack of a variance indicates that costs in total (materials, labor, and overhead) were the same as planned.

Selling Expenses. The original budget for selling expenses included variable and fixed expenses. To determine the flexible budget amount, the two variable costs need to be updated. The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%). These are added to the fixed costs of $12,500 to get the flexible budget amount of $24,750.

General and Administrative Expenses. This flexible budget is unchanged from the original (static budget) because it consists only of fixed costs which, by definition, do not change if the activity level changes.

Income Taxes. Income taxes are budgeted as 40% of income before income taxes. The flexible budget for income before income taxes is $20,625, and 40% of that balance is $8,250. Actual expenses are lower because the income before income taxes was lower. The actual tax rate is also 40%.

Net Income. Total net income changes as the amount for each line on the income statement changes. The net variance in this example is mainly due to lower revenues.

The important thing to remember in preparing a flexible budget is that if an amount, cost or revenue, was variable when the original budget was prepared, that amount is still variable and will need to be recalculated when preparing a flexible budget. If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range.

Budget reports can be a useful tool for evaluating a manager's effectiveness only if they contain the appropriate information. When preparing budget reports, it is important to include in the report the items the manager can control. If a manager is only responsible for a department's costs, to include all the manufacturing costs or net income for the company would not result in a fair evaluation of the manager's performance. If, however, the manager is the Chief Executive Officer, the entire income statement should be used in evaluating performance.

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Exercise 22-5 Fallon Company uses flexible budgets to control its selling expens

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Exercise 22-5 Fallon Company uses flexible budgets to control its selling expens

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