Flexible Budget

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DISCUSSION

Our group discuss about case 11-55. Below are the solution:

Question 1
Prepare a new contribution report for February, in which:

* The static budget column in the contribution report is replaced with a flexible budget column. * The variances in the contribution report are recomputed as the difference between the flexible budget and actual columns.

Answer

Particulars| Static Budget| Flexible Budget| Actual | Variance| Unit (pounds) | 200000| 225000| 225000| 0|
Revenue| 1600000| 1800000| 1777500| 22500 U|
Direct Material| 290000| 326250| 432500| -106250 U|
Direct Labor| 168000| 189000| 174000| 15000 F|
Variable Overhead| 324000| 364500| 375000| -10500 U|
Total Variable Costs| 782000| 879750| 981500| -101750 U| Contribution Margin| 818000| 920250| 796000| 124250 U|

CALCULATION
Revenue = 225000 X 8.00 per pound
= 1800000
Direct material (quantity) =290000 / 200000
= 1.45
Direct material = 1.45 X 225000
= 326250
Direct labor (quantity) = 168000 / 200000
= 0.84
Direct labor = 0.84 X 225000
= 189000
Variable overhead = 1.62 X 225000
= 364500

Total Variable Costs = Direct material + Direct labor + Variable overhead = 326250 + 189000 + 364500 = 879750
Total contribution margin = Revenue – Total variable costs = 920250

Question 2
What is the total contribution margin in the flexible budget column of the new report prepared for requirement (1)?

Answer

Total contribution margin = Revenue – Total variable costs = $1800000 - $879750 = 920250

- Total contribution margin in the flexible budget is RM 920250.

Question 3

Explain (i.e., interpret) the meaning of the total contribution margin in the flexible budget column of the new report prepared for requirement (1).

Answer

The interpretation of the contribution margin on the flexible budget, $920250, is as follows : If the unit sales price and unit variable costs had all remained at their budgeted levels and sales volume increases from 200000 units to 225000 units, the contribution margin would have been $920250.QUESTION 4| | What is the total variance between the flexible budget contribution margin and the actual contribution margin in the new report prepared for requirement (1)? Explain this total contribution margin variance by computing the following variance. ( Assume that all materials are used in the month of purchase.) a) Direct-material price variance b) Direct-material quantity variance c) Direct-labor rate variance d) Direct-labor efficiency variance e) Variable-overhead spending variance f) Variable-overhead efficiency variance g) Sales-price varianceANSWERThe variance between the flexible budget contribution margin and the actual contribution margin, from requirement (1) is $124250 (Unfavorable). This $124250 unfavorable variance between the flexible budget and actual contribution margin for the chocolate nut supreme cookie product line during April is explained by the following variances: a) Direct material price variance| | | | | Type of Material| PQ*(AP - SP)|  | Variance|  |

Cookie mix| 2325000($0.02-$0.02)|  | $0 |  |
Milk chocolate| 1330000($0.02-$0.15)|  | $66500| U|
Almonds|  | 240000($0.50-$0.50)|  | $0|  |
Total|  |  |  |  | $66500| U|
 |  |  |  |  |  |  |
*PQ=AQ, because all materials were used during the month of purchase.| AP=actual total costs(given)/actual quantitySP= standard total costs| | | |
| |
b) Direct Material Quantity Variance| | | |
TYPE of material|  | SP(AQ-SQ*)|  |...
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