roblem 6-31 (Part Level Submission) ressure Reducers, Inc. produces and sells lu
ID: 2537884 • Letter: R
Question
roblem 6-31 (Part Level Submission) ressure Reducers, Inc. produces and sells lumbar support cushions for office chairs using a special foam that molds to a person's back. Since all products are made to order, the only inventory the compan aintains is raw materials. Thus, all costs of production are recognized in the period in which they are incurred. The following annual report was prepared from the company's accounting records: Actual Budget Variance 670 Unfavorable nits sold ales revenue ost of goods sold ross margin elling and administrative expenses perating income 14,500 15,170 $2,898,510 $2,927,810 $29,300 Unfavorable 22,900 Favorable 2,076,450 2,099,350 828,460 290,000 $533,430 $538,460 6,400 Unfavorable 1,370 Favorable $5,030 Unfavorable 822,060 288,630 he following fixed costs are included in these amounts. Actual Budget ost of goods sold elling and administrative expenses $195,700 $203,100 138,300 138,300 ank Martinez, Pressure Reducers' CFO, used the following standard cost card in preparing the budget and thought he had done a good job estimating production and sales. He wonders why the variable co oods sold deviated from that budget. Total Cost $50 40 35 $125 Standard Quantity Standard Price $5 per yard $8 per DLH $7 per DLH per Unit per Unit irect material irect labor ariable overhead 10 yards 5 hours 5 hoursExplanation / Answer
Solution:
Flexible Budget is the budget prepared by taking actual activity but at standard or budgeted cost.
Flexible Budget Variance is the difference between Actual Result and Flexible Budget.
Static Budget is the master budget prepared by the company at standard activity and standard cost.
Sales Volume variance is the difference between flexible budget and static budget.
Actual Result
Flexible Budget Variance
Flexible Budget
Sales Volume Variance
Static Budget
Units Sales
14500
0
NA
14500
670
U
15170
Revenue
$2,898,510
$100,010
F
$2,798,500
$129,310
U
$2,927,810
Less:
Variable Expenses
Cost of Goods Sold
$1,880,750
$68,250
U
$1,812,500
$83,750
F
$1,896,250
Selling and administrative
$150,330
$5,330
U
$145,000
$6,700
F
$151,700
Total Variable Expenses
$2,031,080
$73,580
U
$1,957,500
$90,450
F
$2,047,950
Contribution Margin (Sales - Total Variable Expenses)
$867,430
$26,430
F
$841,000
$38,860
U
$879,860
Less:
Fixed Expenses
Cost of Goods Sold
$195,700
$7,400
F
$203,100
$0
NA
$203,100
Selling and administrative
$138,300
$0
NA
$138,300
$0
NA
$138,300
Total Fixed Expenses
$334,000
$7,400
F
$341,400
$0
NA
$341,400
Operating Income
$533,430
$33,830
F
$499,600
-$38,860
F
$538,460
Note—
1) Standard Unit Selling Price = Total Budgeted Sales Revenue / Units Sold = $2,927,810 / 15,170 = $193
2) Standard Variable cost of goods sold = $125 per unit x 14,500 Units = $1,812,500
3) Standard Unit Selling and administrative Expense = Total Variable Selling and admn expense / Unit sold
= $151,700 / 15,170
= $10 per unit
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Actual Result
Flexible Budget Variance
Flexible Budget
Sales Volume Variance
Static Budget
Units Sales
14500
0
NA
14500
670
U
15170
Revenue
$2,898,510
$100,010
F
$2,798,500
$129,310
U
$2,927,810
Less:
Variable Expenses
Cost of Goods Sold
$1,880,750
$68,250
U
$1,812,500
$83,750
F
$1,896,250
Selling and administrative
$150,330
$5,330
U
$145,000
$6,700
F
$151,700
Total Variable Expenses
$2,031,080
$73,580
U
$1,957,500
$90,450
F
$2,047,950
Contribution Margin (Sales - Total Variable Expenses)
$867,430
$26,430
F
$841,000
$38,860
U
$879,860
Less:
Fixed Expenses
Cost of Goods Sold
$195,700
$7,400
F
$203,100
$0
NA
$203,100
Selling and administrative
$138,300
$0
NA
$138,300
$0
NA
$138,300
Total Fixed Expenses
$334,000
$7,400
F
$341,400
$0
NA
$341,400
Operating Income
$533,430
$33,830
F
$499,600
-$38,860
F
$538,460
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