Osage, Inc., manufactures and sells lamps. The company produces only when it rec

Question

Osage, Inc., manufactures and sells lamps. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month: Actual (based on actual orders for 450,000 units) Master Budget (based on budgeted orders for 480,000 units) Sales revenue $ 4,968,000 $ 4,800,000 Less Variable costs Materials 1,440,000 1,440,000 Direct labor 276,000 336,000 Variable overhead 674,400 624,000 Variable marketing and administrative 468,000 480,000 Total variable costs $ 2,858,400 $ 2,880,000 Contribution margin $ 2,109,600 $ 1,920,000 Less Fixed costs Manufacturing overhead 988,800 960,000 Marketing 288,000 288,000 Administrative 204,000 180,000 Total fixed costs $ 1,480,800 $ 1,428,000 Operating profits $ 628,800 $ 492,000 Required: Prepare a profit variance analysis for Osage, Inc. (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Explanation / Answer

Ans. Profit Variance Analysis of OSAGE INC. Manufacturing Market. & adm. Sales price   Sales Activity variance Actual results variance variance Variance Flexible budget Master Budget Sales revenue 4968000 468000 F 4500000 300000 U 4800000 Variable costs: Material 1440000 90000 U 1350000 90000 F 1440000 Direct labor 276000 39000 F 315000 21000 F 336000 Variable overhead 674400 89400 U 585000 39000 F 624000 Variable marketing and administrative 468000 18000 U 450000 30000 F 480000 Total Variable Costs 2858400 140400 U 18000 U 2700000 180000 F 2880000 Contribution margin 2109600 140400 U 18000 U 468000 F 1800000 120000 U 1920000 Fixed costs: Manufacturing overhead 988800 28800 U 960000 0 no effect 960000 Marketing 288000 0 288000 0 no effect 288000 Administrative 204000 24000 U 180000 0 no effect 180000 Total Fixed Costs 1480800 28800 U 24000 U 1428000 0 no effect 1428000 Operating Profits 628800 169200 U 42000 U 468000 F 372000 120000 U 492000 *Calculation: Flexible budget Units 450000 Sales revenue 4800000/480000*450000 Variable costs: Material 1440000/480000*450000 Direct labor 336000/480000*450000 Variable overhead 624000/480000*450000 Variable marketing and administrative 480000/480000*450000 *Flexible budget is prepared on the basis of actual unit sales. Sales price variance = Actual results - flexible budget. Manufacturing variance = Actual Manufacturing cost - Flexible manufacturing costs Market. & Administration variance = Actual marketing & adm. exp. - Flexible marketing & admin. Exp. Sales Activity variance = Flexible budget - Planning budget. *Increase in sales, contribution & profit = Favorable. *Decrease in sales, contribution & profit = Unfavorable. *Increase in variable & fixed cost = Unfavorable. *Decrease in variable & fixed cost = Favorable.

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