Eco-Green Company manufactures cloth shopping bags that it plans to sell for $5 each. Budgeted production and sales for these bags for 2011 is 800,000 bags, with a standard of 400,000 machine hours for the whole year. Budgeted fixed overhead costs are $470,000, and variable overhead cost is $1.60 per machine hour. Because of increased demand, actual production and sales of the bags for 2010 are 900,000 bags using 440,000 actual machine hours. Actual variable overhead costs are $699,600 and actual fixed overhead is $501,900. Actual selling price is $6 per bag. Direct materials and direct labor actual costs were the same as standard costs, which were $1.20 per unit and $1.80 per unit, respectively.

Required

1. Calculate the variable overhead and fixed overhead variances (spending, efficiency, spending and volume).

2. Create a chart like that in Exhibit 7-2 showing Flexible Budget Variances and Sales Volume Variances for revenues, costs, contribution margin, and operating income.

3. Calculate the operating income based on budgeted profit per shopping bag.

4. Reconcile the budgeted operating income from requirement 3 to the actual operating income from your chart in requirement 2.

5. Calculate the operating income volume variance and show how the sales volume variance is comprised of the production volume variance and the operating income volume variance.