Assume that in October 2022 the Schmidt Machinery Company (Exhibit 14.1) manufactured and sold 970 units for $837 each. During this month, the company incurred $499,550 total variable costs and $180,200 total fixed costs. The master budget data for the month are as given in Exhibit 14.1.
Required:
1. Prepare a flexible budget for the production and sale of 970 units.
2. Compute for October 2022:
a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable or unfavorable.
b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable or unfavorable.
3. Compute for October 2022:
a. The total flexible budget variance. Indicate whether this variance was favorable or unfavorable.
b. The total variable cost flexible budget variance. Indicate whether this variance was favorable or unfavorable.
c. The total fixed cost flexible budget variance. Indicate whether this variance was favorable or unfavorable.
d. The selling price variance. Indicate whether this variance was favorable or unfavorable.
Compute for October 2022:
a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable or unfavorable.
b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable or unfavorable.
In October 2022, Schmidt Machinery Company faced a dynamic business environment, manufacturing and selling 970 units at a price of $837 each. In this essay, we will delve into the various performance variances associated with the company’s operations during this period, utilizing flexible budgeting techniques to shed light on their financial performance.
Before delving into the variances, let’s establish a flexible budget for the production and sale of 970 units. A flexible budget accommodates variations in activity levels, helping us to evaluate performance more accurately. Given the master budget data, we compute the flexible budget as follows:
Fixed Costs: $180,200 Variable Costs per Unit: $499,550 / 970 units = $514.43 Flexible Budget for 970 units: Fixed Costs + (Variable Costs per Unit * 970) = $180,200 + ($514.43 * 970) = $675,389.10
The sales volume variance measures the difference between the actual results and the flexible budget at the actual level of activity. To understand the impact of this variance on operating income and contribution margin, let’s dissect it further:
Sales Volume Variance in Terms of Operating Income
Operating Income (Actual) – Operating Income (Flexible Budget) Actual Sales Revenue – Actual Variable Costs – Actual Fixed Costs ($837 * 970) – $499,550 – $180,200 = $102,549
The positive value indicates an unfavorable sales volume variance in terms of operating income, suggesting that the company’s operating income fell short of expectations due to lower sales than anticipated.
Sales Volume Variance in Terms of Contribution Margin: Contribution Margin (Actual) – Contribution Margin (Flexible Budget) Actual Sales Revenue – Actual Variable Costs ($837 * 970) – $499,550 = $308,090
The positive value signifies a favorable sales volume variance in terms of contribution margin, implying that the company generated higher contribution margin than expected despite the lower sales.
The total flexible budget variance reflects the difference between actual results and the flexible budget across all aspects of the budget.
Total Flexible Budget Variance: Operating Income (Actual) – Operating Income (Flexible Budget) ($837 * 970) – $499,550 – $180,200 – $675,389.10 = -$17,139.10
The negative value indicates an unfavorable total flexible budget variance, suggesting that the company’s overall financial performance fell short of the flexible budget’s expectations.
Total Variable Cost Flexible Budget Variance: Total Actual Variable Costs – Total Variable Costs (Flexible Budget) $499,550 – ($514.43 * 970) = -$14,019.10
The negative value implies a favorable total variable cost flexible budget variance, indicating that the actual variable costs were lower than anticipated.
Total Fixed Cost Flexible Budget Variance: Total Actual Fixed Costs – Total Fixed Costs (Flexible Budget) $180,200 – $180,200 = $0
The variance is neutral, indicating that actual fixed costs aligned with the flexible budget.
Selling Price Variance: The selling price variance reflects the difference between the actual selling price and the budgeted selling price, multiplied by the actual quantity sold.
Selling Price Variance = (Actual Selling Price – Budgeted Selling Price) * Actual Quantity Sold = ($837 – $837) * 970 = $0
The selling price variance is neutral, indicating that the actual selling price matched the budgeted selling price.
In conclusion, the performance variances for Schmidt Machinery Company in October 2022 reveal a complex interplay of factors impacting its financial results. While the company faced an unfavorable sales volume variance in terms of operating income due to lower sales than expected, it managed to achieve a favorable sales volume variance in terms of contribution margin by maximizing its contribution per unit. The overall financial performance fell short of the flexible budget, primarily driven by unfavorable variances in variable costs. However, the company managed to align its fixed costs with the flexible budget and maintain the selling price as budgeted. This analysis underscores the importance of flexible budgeting in assessing the impact of changing activity levels on a company’s financial performance.
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