Solve for Master Budget Given Actual Results
A new accounting intern at Gibson Corporation lost the only copy of this period’s master budget. The CFO wants to evaluate performance for this period but needs the master budget to do so. Actual results for the period follow:
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Sales volume |
120,000 units |
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Sales revenue |
$672,000 |
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Variable costs |
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Manufacturing |
147,200 |
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Marketing and administrative |
61,400 |
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Contribution margin |
$463,400 |
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Fixed costs |
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Manufacturing |
205,000 |
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Marketing and administrative |
113,200 |
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Operating profit |
$145,200 |
The company planned to produce and sell 108,000 units for $5 each. At that volume, the contribution margin would have been $380,000. Variable marketing and administrative costs are budgeted at 10 percent of sales revenue. Manufacturing fixed costs are estimated at $2 per unit at the normal volume of 108,000 units. Management notes, “We budget an operating profit of $1 per unit at the normal volume.”
Required
a. Construct the master budget for the period.
b. Prepare a profit variance analysis like the one in Exhibit 16.5.
Exhibit 16.5 Profit Variance Analysis, August—Bayou Division
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(2) |
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(6) |
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(7) |
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Flexible |
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Master Budget |
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Actual (based |
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Budget (based |
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(based on |
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on actual |
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Marketing and |
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on actual |
Sales |
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planned |
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activity of |
Manufacturing |
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Administrative |
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Sales Price |
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activity of |
Activity |
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activity of |
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2 |
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80,000 units) |
Variances |
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Variances |
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Variance |
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80,000 units) |
Variance |
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100,000 units) |
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3 |
Sales revenue |
$ 840,000 |
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$ 40,000 |
F |
$ 800,000 |
$ 200,000 |
U |
$ 1,000,000 |
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4 |
Less |
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5 |
Variable costs |
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Variable manufacturing costs |
329,680 |
$ 25,680 |
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a |
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304,000 |
76,000 |
F |
380,000 |
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7 |
Variable selling and administrative |
68,000 |
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$ 4,000 |
F |
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72,000 |
18,000 |
F |
90,000 |
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8 |
Contribution margin |
$ 442,320 |
$ 25,680 |
U |
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$ 4,000 |
F |
$ 40,000 |
F |
$ 424,000 |
$ 106,000 |
U |
$ |
530,000 |
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Fixed costs |
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Fixed manufacturing overhead |
195,500 |
4,500 |
F |
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200,000 |
–0– |
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200,000 |
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Fixed selling and administrative costs |
132,320 |
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7,680 |
F |
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140,000 |
–0– |
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140,000 |
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12 |
Profit |
$ 114,500 |
$ 21,180 |
U |
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$ 11,680 |
F |
$ 40,000 |
F |
$ |
84,000 |
$ 106,000 |
U |
$ |
190,000 |
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14 |
aThe individual cost variances are shown in Exhibit 16.11. |
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Exhibit 16.11 Variable Manufacturing Cost Variance Summary, August—Bayou Division
in Exhibit 16.5. The cost variance analysis just completed is a more detailed analysis of the variable production cost variance derived in Exhibit 16.5.
A summary of this nature is useful for reporting variances to high-level managers. It provides both an overview of variances and their sources. When used for reporting, the computations at the right of Exhibit 16.11 usually are replaced with a brief explanation of the cause of the variance.
Management might want more detailed information about some of the variances. Extending each variance branch in Exhibit 16.11 to show variances by product line, department, or other categories can provide this additional detail.