Derive Amounts for Profit Variance Analysis
Aqua Clean, Inc., operates a pool cleaning service. Aqua Clean wants to compare this month’s results with those for last month, which is believed to be a typical “base period.” Assume that the following information is provided:
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Last Month |
This Month |
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Number of cleanings |
140 |
161 |
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Revenues |
$22,680 |
$22,800 |
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Variable costs |
4,620 |
5,220 |
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Contribution margin |
$18,060 |
$17,580 |
Required
Compute the flexible budget and sales activity variance and prepare a profit variance analysis (like the one in Exhibit 16.5 of the previous chapter) in as much detail as possible.
Exhibit 16.5 Profit Variance Analysis, August—Bayou Division
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1 |
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(1) |
(2) |
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(3) |
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(4) |
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(5) |
(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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6 |
Variable manufacturing costs |
329,680 |
$ 25,680 |
U |
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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9 |
Fixed costs |
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10 |
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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11 |
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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13 |
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14 |
aThe individual cost variances are shown in Exhibit 16.11. |
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15 |
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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.