Network Technologies manufactures capacitors for cellular base stations and othe

Question

Network Technologies manufactures capacitors for cellular base stations and other communication applications. The company's july 2014 flexible budget shows output levels of 7,000, 8,500, and 10,500 units. The static budget was based on expected sales of 8,500 units.

Network Technologies

Flexible Budget

For Month ended July 31, 2014

Budget amounts per unit

-The company sold 10,500 units during July, and its actual operating income was as follows:

Network Technologies

Income Statement

For month ended july 31, 2014

Requirements:

1. Prepare a flexiible budget Performance report for July 2014.

2. What was the effect on Network's operating income of selling 2,000 units more than the static budget level of sales?

3. What is network's static budget variance?

4. Explain why the flexible budget performance report provides more useful information to network's managers than the simple static budget variance. what insights can network's managers draw from this performance report?

Network Technologies

Flexible Budget

For Month ended July 31, 2014

Budget amounts per unit

By units 7,000 8,500 10,500 Sales Revenue $25 $175,000 $212,500 $262,500 Variable Expenses 13 91,000 110,500 136,500 Contribution Margin 84,000 102,000 126,000 Fixed Expenses 56,000 56,000 56,000 Operating Income $28,000 $46,000 $70,000

Explanation / Answer

Part 1)

The flexible budget performance report is given in the following table:

_________

Part 2)

Selling 2,000 units more than the static budget level of sales of $2,000 resulted in an increase in opertaing income by $24,000 (indicated in flexible budget performance report) provided above.

_________

Part 3)

Networks' static budget variance is the difference between the operating income at actual units and operating income at 8,500 (static) units.

Static Budget Variance = 71,000 - 46,000 = $25,000 (F)

_________

Part 4)

The calculation of sales volume variance in flexible budget performance report indicates how increase in unit sales have resulted in an increase in operating income or how any change in the units sales will impact operating income. Similarly, sales revenue variance would indicate whether the actual sales price was higher or lower than the planned sales price. As both of these variances were favorable, it can be concluded that the network's managers (marketing) were able to sell more units at a higher selling price. These variances can therefore, be used to evaluate the performance of managers and understand the impact of changes in unit sales and selling price which is not possible with the use of static budget.

Network Technologies Flexible Budget Performance Report Month Ended July 31, 2014
Actual Results at Actual Prices

Flexible Budget Variance Flexible Budget for Actual Number of Output Units

Sales Volume Variance

Static (Master) Budget Units 10,500 0 10,500 2,000 (F) 8,500 Sales revenue 269,500 7,000 (F) 262,500 (10,500*25) 50,000 (F) 212,500 Variable expenses 141,500 5,000 (U) 136,500 (10,500*13) 26,000 (U) 110,500 Contribution margin 128,000 2,000 (F) 126,000 (10,500*12) 24,000 (F) 102,000 Fixed expenses 57,000 1,000 (U) 56,000 0 56,000 Operating income $71,000 $1,000 (F) $70,000 $24,000 (F) $46,000

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