Big Time Videos Inc. makes DVDs to sell to stores around the country. Top manage
ID: 2532507 • Letter: B
Question
Big Time Videos Inc. makes DVDs to sell to stores around the country. Top management meets on the first Tuesday of the month to evaluate the previous month’s performance. Prior to your arrival at the company the accounting department produced the following Static Budget Performance Report for the meeting.
The company had expected to sell 9,800 units but the actual results revealed that only 8,200 units were sold during the month. You notice right away that the actual sales price per unit was $21 and that was more that the budgeted sales price per unit. There were no changes in inventory levels.
You are the new financial consultant to the company, and you know that variable costs such as direct materials, direct labor, manufacturing overhead costs vary with the sales volume (units). Moreover, you know that fixed costs are expected to remain the same regardless of the sales volume but it is not likely that fixed costs can be estimated (budgeted) exactly so some differences can be expected.
At the beginning of the meeting the CEO of company blurts out “Operating Income so low…only $9,700”….then pointing to the favorable variable cost variances…..how in the world can there be so many favorable variances in the Static Budget Performance Report?” There is silence. More silence….then you hear it (you knew this was coming). “As our new financial consultant, what are your thoughts on the subject?”
Your reply….”Thank you for asking, the Static Budget Performance Report does not explain how much of the variances are a result of the difference in the sales PRICE per unit and COSTS per unit, nor does it explain how much of the variances are a result of the difference in the number of UNITS sold. To help explain the variances I will prepare a Flexible Budget Performance Report.
Big Time Videos Inc.
Static Budget Performance Report
For the Month Ended January 31, 2018
Actual
Static
Budget Amt.
Results
Budget
Variance
F or U
Units per Unit
8,200
9,800
1,600
U
Sales Revenue $20.00
$ 172,200
$ 196,000
$23,800
U
Variable Costs-Manufacturing
Direct Materials $10.00
77,500
98,000
20,500
F
Direct Labor $ 1.10
7,700
10,780
3,080
F
Overhead $ .55
4,300
5,390
1,090
F
Total Variable Costs
89,500
114,170
24,670
F
Contribution Margin
82,700
81,830
870
F
Fixed Costs:
Manufacturing - Salaries
31,100
30,050
1,050
U
Manufacturing -Depreciation
20,900
21,400
500
F
Selling Costs - Salaries
12,900
10,825
2,075
U
Selling Costs - Advertising
8,100
6,850
1,250
U
Total Fixed Costs
73,000
69,125
3,875
U
Operating Income
9,700
12,705
3,005
U
Your Plan:
1. Prepare a report that provides more information (prepare a flexible budget performance report for the
actual number of units sold)…so you will need to complete the Flexible Budget column based on your
knowledge of the behavior of variable cost and fixed cost. Then identify the variance caused by
Price/Cost and the variance caused by the difference in the number of units sold. Complete your work
using this Word document. After completing Flexible Budget Performance Report answer questions 2
thru 7 below in the response space provided.
Big Time Videos Inc.
Flexible Budget Performance Report
For the Month Ended January 31, 2018
Actual
F or
U
Flexible
F
or
U
Static
.
Results
Var.
(caused by Price/Cost)
Budget
(expected results for 9,800 units)
Var.
(caused by number of units sold)
Budget (expected results for 9,800 units)
Units
8,200
8,200
1,600
9,800
Sales Revenue
$ 172,200
$
$
$
$196,000
Variable Costs-Manufacturing
Direct Materials
77,500
98,000
Direct Labor
7,700
10,780
Overhead
4,300
5,390
Total Variable Costs
89,500
114,170
Contribution Margin
82,700
81,830
Fixed Costs:
Manufacturing - Salaries
31,100
30,050
Manufacturing -Depreciation
20,900
21,400
Selling Costs - Salaries
12,900
10,825
Selling Costs - Advertising
8,100
6,850
Total Fixed Costs
73,000
69,125
Operating Income (loss)
9,700
10,355
F
(655)
13,360
U
12,705
Check number
2. Identify the amount of Flexible Budget Variance, Sales Volume Variance and Static Budget Variance.
Discuss the meaning/relevance of each.
Response:
3. Answer the CEO’s question about the low operating income of $9,700….yet there are so many
Favorable variances, including the Favorable Operating Income Variance of $10,355. How can that be?
Response:
4. Which of the variances in the performance report should be investigated and why? What are the
possible explanations for each variance (we don't have all of the underlying information but will want
to discuss some of the possible reasons for Sales Revenue and Costs being higher or lower than
expected (no exact perfect answer...just think logically about what may have happened).
Response:
5. Based on your analysis, how would you rate the company’s performance? Why?
Response:
6. To help explain what happened, provide a brief description of the information that the report provides
including the basic difference between variable and fixed costs.
Response:
7. You want to impress the CEO, so you want to go above and beyond what you were asked to do.
Calculate the breakeven point in Sales Revenue in Dollars and Units and calculate the Sales Revenue in
Dollars and Units that would be required for the company to make $20,000 (target profit). (chapter 20)
Response:
Big Time Videos Inc.
Static Budget Performance Report
For the Month Ended January 31, 2018
Actual
Static
Budget Amt.
Results
Budget
Variance
F or U
Units per Unit
8,200
9,800
1,600
U
Sales Revenue $20.00
$ 172,200
$ 196,000
$23,800
U
Variable Costs-Manufacturing
Direct Materials $10.00
77,500
98,000
20,500
F
Direct Labor $ 1.10
7,700
10,780
3,080
F
Overhead $ .55
4,300
5,390
1,090
F
Total Variable Costs
89,500
114,170
24,670
F
Contribution Margin
82,700
81,830
870
F
Fixed Costs:
Manufacturing - Salaries
31,100
30,050
1,050
U
Manufacturing -Depreciation
20,900
21,400
500
F
Selling Costs - Salaries
12,900
10,825
2,075
U
Selling Costs - Advertising
8,100
6,850
1,250
U
Total Fixed Costs
73,000
69,125
3,875
U
Operating Income
9,700
12,705
3,005
U
Explanation / Answer
Big Time Videos Inc.
Flexible Budget Performance Report
For the month ended January 31, 2018
Actual Results Revenue and Spending Variances Flexible Budget Volume / Activity Variances Static Budget Sales Units 8,200 None 8,200 1,600 U 9,800 Sales Revenue $172,200 $ 8,200 F $164,000 $ 32,000 U $196,000 Variable Manufacturing Costs Direct Materials 77,500 4,500 F 82,000 16,000 F 98,000 Direct Labor 7,700 1,320 F 9,020 1,760 F 10,780 Overhead 4,300 210 F 4,510 880 F 5,390 Total Variable Costs 89,500 6,030 F 95,530 18,640 F 114,170 Contribution Margin 82,700 14,230 F 68,470 13,360 U 81,830 Fixed Costs Manufacturing Salaries 31,100 1,050 U 30,050 None 30,050 Manufacturing Depreciation 20,900 500 F 21,400 None 21,400 Selling Costs:Salaries 12,900 2,075 U 10,825 None 10,825 Selling Costs: Advertising 8,100 1,250 U 6,850 None 6,850 Total Fixed Costs 73,000 3,875 U 69,125 None 69,125 Operating Income ( loss) 9,700 10,355 F (655) 13,360 U 12,705Related Questions
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