Compute the static budget variance, the sales-activity variance and the flexible-budget variance for both (i) revenues and (ii) operating income. Use U or F to indicate whether the... Compute the static budget variance, the sales-activity variance and the flexible-budget variance for both (i) revenues and (ii) 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

The static budget variance for revenues is calculated as follows:

[ \text{Static Budget Variance for Revenues} = \text{Actual Revenues} - \text{Static Budget Revenues} ]

Substituting the values gives:

[ \text{Static Budget Variance for Revenues} = 360,000 - 300,000 = 60,000 ]

2. Calculate the Static Budget Variance for Operating Income

The static budget variance for operating income is calculated similarly:

[ \text{Static Budget Variance for Operating Income} = \text{Actual Operating Income} - \text{Static Budget Operating Income} ]

Using the given figures:

[ \text{Static Budget Variance for Operating Income} = 54,500 - 43,360 = 11,140 ]

3. Determine the Sales-Activity Variance for Revenues

The sales-activity variance adjusts the static budget to the actual level of activity, and it is calculated as:

[ \text{Sales-Activity Variance for Revenues} = \text{Flexible Budget Revenues} - \text{Static Budget Revenues} ]

First, we need to calculate the flexible budget revenues, which are calculated using the actual units sold:

[ \text{Flexible Budget Revenues} = \text{Actual Units Sold} \times \text{Revenue per Unit} ]

Revenue per unit from the static budget is:

[ \text{Revenue per Unit} = \frac{300,000}{12,000} = 25 ]

Thus:

[ \text{Flexible Budget Revenues} = 15,000 \times 25 = 375,000 ]

So:

[ \text{Sales-Activity Variance for Revenues} = 375,000 - 300,000 = 75,000 ]

4. Determine the Sales-Activity Variance for Operating Income

To find the sales-activity variance for operating income, we need to calculate the flexible-budget operating income. First, we will calculate the variable costs based on the actual volume:

• Direct labor: ( 96,900 )
• Direct material: ( 165,000 )
• Commissions: ( 16,500 )
• Variable manufacturing overhead: ( 3,600 )

Then, the flexible-budget operating income is calculated as follows:

[ \text{Flexible Budget Operating Income} = \text{Flexible Budget Revenues} - \text{Total Variable Costs} ]

Where:

[ \text{Total Variable Costs} = \text{Direct Labor} + \text{Direct Material} + \text{Commissions} + \text{Variable Overhead} ]

Calculating the total variable costs:

[ \text{Total Variable Costs} = 96,900 + 165,000 + 16,500 + 3,600 = 282,000 ]

Then:

[ \text{Flexible Budget Operating Income} = 375,000 - 282,000 = 93,000 ]

Finally, the sales-activity variance for operating income:

[ \text{Sales-Activity Variance for Operating Income} = 93,000 - 43,360 = 49,640 ]