Profit Variance Analysis, Service Organization
Refer to the data in Exercise in 17 24. Prepare a profit variance analysis for Lowe & Rent like the one in Exhibit 16.5 of the previous chapter.
Exercise 17 24: Flexible Budgeting, Service Organization
Lowe & Rent is a law firm that specializes in probate work. Last year, the firm billed more hours than expected, but, as the following data show, profits were lower than anticipated.
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Reported Income |
Master |
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Statement |
Budget |
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Billable hoursa |
6,900 |
6,000 |
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Revenue |
$825,000 |
$750,000 |
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Professional salaries (all variable) |
465,000 |
375,000 |
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Other variable costs (e.g., supplies, computer services) |
108,000 |
102,000 |
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Fixed costs |
174,000 |
180,000 |
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Profit |
$ 78,000 |
$ 93,000 |
Required
Prepare a flexible budget for Lowe & Rent. Use billable hours as the measure of output (that is, units produced).
Exhibit 16.5 Profit Variance Analysis, August—Bayou Division
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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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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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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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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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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 |
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$ 4,000 |
F |
$ 40,000 |
F |
$ 424,000 |
$ 106,000 |
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$ |
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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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.