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Horngren'S Financial And Managerial Accounting
Found in: Page 1265

Short Answer

Preparing a flexible budget performance report

Cell Plus Technologies manufactures capacitors for cellular base stations and other communication applications. The company’s July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000 units. The static budget was based on expected sales of 10,000 units.

Cell One Technologies

Flexible budget

For month ended July 31, 2018

Budgeted amount per unit

Units

8,500

10,000

12,000

Sales revenue

$24

$204,000

$240,000

$288,000

Variable expenses

13

110,500

130,000

156,000

Contribution margin

93,500

110,000

132,000

Fixed expenses

57,000

57,000

57,000

Operating income

$36,500

$53,000

$75,000

The company sold 12,000 units during July, and its actual operating income was as follows:

Cell One Technologies

Income statement

For the Month Ended July 31, 2018

Sales revenue

$295,000

Variable expenses

161,100

Contribution margin

133,900

Fixed expenses

58,000

Operating income

$75,900

Requirements

1. Prepare a flexible budget performance report for July 2018.

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

3. What is Cell Plus’s static budget variance for operating income?

4. Explain why the flexible budget performance report provides more useful information to Cell Plus’s managers than the simple static budget variance. What insights can Cell Plus’s managers draw from this performance report?

  1. Flexible budget variance: $900; Sales volume variance: $22,000.
  2. Sales of 2,000 units more generate income of $22,000 more than the budgeted income.
  3. Static budget variance for operating income: $22,900.
  4. Flexible budget performance report separates into flexible budget variance and sales volume variance.
See the step by step solution

Step by Step Solution

Definition of Flexible Budget

The budget that gets adjusted according to the level of activity the company achieves is known as a flexible budget. This budget gets adjusted according to the business’s cost variation.

Flexible budget performance report

Particular

Actual results

Flexible budget variance

Flexible budget

Sales volume variance

Static budget

Units

12,000

12,000

10,000

Sales revenue

$295,000

$7,000(F)

$288,000

$48,000(F)

$240,000

Variable expenses

161,100

5,100(U)

156,000

26,000(U)

130,000

Contribution margin

133,900

1,900(F)

132,000

22,000(F)

110,000

Fixed expenses

58,000

1,000(U)

57,000

0

57,000

Operating income

$75,900

$900(F)

$75,000

$22,000(F)

$53,000

Effect of excess sales on operating income

When the business entity sells 2,000 units more than the level of sales of the static budget, it will increase the operating income of the business entity by $22,000.

Static budget variance for operating income

Particular

Amount $

Flexible budget variance operating income

$900

Sales volume variance operating income

22,000

Static budget variance for operating income

$22,900

Importance of information provided by flexible budget

A flexible budget performance report provides more useful information than a static budget because it is prepared for only one activity level and does not change. At the same time, flexible budget variance separates variance into two components:

  1. Flexible budget variance.
  2. Sales volume variance.

The performance reports reflect that the business entity’s operating income is $900 more than the flexible budget. If the actual sales are compared with the static budget, the business entity can generate a $22,000 higher operating income when it sells 2,000 units.

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