Compute the static budget variance, the sales-activity variance and the flexible-budget variance for both revenues and operating income. Use U or F to indicate whether the variance... Compute the static budget variance, the sales-activity variance and the flexible-budget variance for both revenues and operating income. Use U or F to indicate whether the variances are favorable or unfavorable. Read more

Steps to Solve

1. Calculate the Static Budget Variance for Revenues and Operating Income

The static budget variance is calculated by subtracting the static budget amounts from the actual results.

For revenues: [ \text{Static Budget Variance (Revenues)} = \text{Actual Revenues} - \text{Static Budget Revenues} ] [ = 360,000 - 300,000 = 60,000 ]

For operating income: [ \text{Static Budget Variance (Operating Income)} = \text{Actual Operating Income} - \text{Static Budget Operating Income} ] [ = 54,500 - 43,360 = 11,140 ]

2. Calculate the Sales-Activity Variance for Revenues and Operating Income

The sales-activity variance bases the static budget amounts on actual sales volume at their budgeted rates.

To determine the new revenue value based on actual units sold:

[ \text{Revenue per unit} = \frac{\text{Static Budget Revenues}}{\text{Static Budget Units Sold}} = \frac{300,000}{12,000} = 25 ] [ \text{Expected Revenue} = \text{Actual Units Sold} \times \text{Revenue per unit} = 15,000 \times 25 = 375,000 ]

The sales-activity variance for revenues is: [ \text{Sales-Activity Variance (Revenues)} = \text{Expected Revenues} - \text{Static Budget Revenues} ] [ = 375,000 - 300,000 = 75,000 ]

For operating income, we calculate the flexible budget operating income assuming budgeted costs remain the same. First, we need to re-calculate variable costs:

• Variable costs per unit:
  • Direct labor: $\frac{72,000}{12,000} = 6$ per unit
  • Direct material: $\frac{144,000}{12,000} = 12$ per unit
  • Commissions: $\frac{15,000}{12,000} = 1.25$ per unit
  • Variable overhead: $\frac{2,640}{12,000} = 0.22$ per unit

Total variable costs (per unit): [ 6 + 12 + 1.25 + 0.22 = 19.47 ]

Expected variable costs with actual units sold: [ \text{Total Variable Costs} = 15,000 \times 19.47 = 291,000 ]

Now subtract the total variable costs from expected revenues: [ \text{Flexible Budget Operating Income} = \text{Expected Revenues} - \text{Total Variable Costs} - \text{Fixed Costs} ] Where Fixed Costs = Fixed Manufacturing Overhead + Rent + Administrative Expenses: [ 12,000 + 3,000 + 8,000 = 23,000 ] [ = 375,000 - 291,000 - 23,000 = 61,000 ]

Now, calculating the sales-activity variance for operating income: [ \text{Sales-Activity Variance (Operating Income)} = \text{Flexible Budget Operating Income} - \text{Static Budget Operating Income} ] [ = 61,000 - 43,360 = 17,640 ]

3. Calculate the Flexible-Budget Variance for Revenues and Operating Income

Now calculate the flexible-budget variance: [ \text{Flexible-Budget Variance (Revenues)} = \text{Actual Revenues} - \text{Expected Revenues} ] [ = 360,000 - 375,000 = -15,000 \quad \text{(unfavorable)} ]

For operating income: [ \text{Flexible-Budget Variance (Operating Income)} = \text{Actual Operating Income} - \text{Flexible Budget Operating Income} ] [ = 54,500 - 61,000 = -6,500 \quad \text{(unfavorable)} ]