Budget Variance

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Exercise 8-3B a. Master Price / Cost Budget per Unit 18,000 Units $12 $216,000 $ 8 (144,000) 72,000 (20,000) (18,000) $ 34,000 b. Flexible Budget 19,000 Units $228,000 (152,000) 76,000 (20,000) (18,000) $ 38,000

Sales Variable manufacturing Contribution margin Fixed manufacturing Fixed selling and admin. Net income Exercise 8-4B

Sales Variable manufacturing Contribution margin Fixed manufacturing Fixed selling and admin. Net income c.

Master Budget 18,000 Units $216,000 (144,000) 72,000 (20,000) (18,000) $ 34,000

Flexible Budget 19,000 Units $228,000 (152,000) 76,000 (20,000) (18,000) $ 38,000

a. & b. Activity Variances $12,000 F 8,000 U 4,000 F 0 0 $ 4,000 F

Since the per unit sales price and per unit variable manufacturing costs are the same for both the master and flexible budgets, the activity variances are solely attributable to the fact that sales volume was 1,000 units more than planned. The favorable $12,000 sales variance suggests that increased sales are beneficial. However, Irvin needs more information before drawing this conclusion. The increase in sales may have resulted from reducing the actual sales price which could produce negative consequences. The unfavorable $8,000 variable manufacturing cost variance is misleading. The total amount of variable cost is expected to increase when volume increases. This variance is expected and not a bad thing. Upper-level marketing managers are normally responsible for the sales volume variances.

d.

The fixed costs in both the master and flexible budgets are estimates. Total fixed costs are assumed to be constant regardless of the volume of production and sales. Therefore, no variance between the master and flexible budgets is expected for fixed costs.

e. Master Budget $20,000 18,000 $38,000 18,000 $2.11 Flexible Budget $20,000 18,000 $38,000 19,000 $2.00

Fixed manufacturing Fixed selling and admin. Total fixed cost (a) Units (b) Cost per unit (a ÷ b)

The increase in sales...
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