Going into the period just ended, Ortiz & Co., manufacturer of a moderately priced espresso maker for retail sale, had planned to produce and sell 3,900 units at $100 per unit. Budgeted variable manufacturing costs per unit are $50. Ortiz pays its salespeople a 10 percent sales commission, which is the only variable nonmanufacturing cost for the company. Fixed costs are budgeted as follows: manufacturing, $50,000; marketing, $36,000. Actual financial results for the period were disappointing. While sales volume was up (4,000 units sold), actual operating profit was only $20,000 for the period. Fixed manufacturing costs were as budgeted, but fixed marketing expenses exceeded budget by $4,000. Actual sales revenue for the period was $390,000, and actual variable costs were $70 per unit (the actual sales commission was 10 percent of sales revenue generated).

 

Master Budget Data:
Sales volume (units) =			3,900
Selling price per unit =			$100.00
Variable manufacturing costs/unit =			$50.00
Variable selling cost (% of sales) =			0.1
Fixed manufacturing costs =			$50,000
Marketing costs =			$36,000
Actual Operating Results:
Sales volume (units) =			4,000
Sales revenue ($) =			$390,000
Total variable costs/unit =			$70.00
Variable selling cost (% of sales) =			10.00%
Fixed manufacturing costs =			$50,000
Increase in Fixed Marketing Costs =			$4,000
Operating Income =			$20,000

Required

1. Develop an Excel spreadsheet that is able to produce a profit-variance report similar to the one presented in text Exhibit 14.4.

2. Use the spreadsheet you developed in (1) and the data presented above to complete the profit-variance report for the period. Below the table you create, show separately the following variances:

a. Total master (static) budget variance (i.e., the total operating-income variance for the period).

b. Total flexible-budget variance.

c. Flexible-budget variance for total variable costs, plus the flexible-budget variance for:

(1) Variable manufacturing costs.

(2) Variable nonmanufacturing costs.

d. Flexible-budget variance for total fixed costs, plus the flexible-budget variance for:

(1) Fixed manufacturing costs.

(2) Fixed nonmanufacturing costs.

3. Provide a concise interpretation for each of the variances calculated above in (2).

EXHIBIT 14.4

Breakdown of Total Operating-

Income Variance

4. Using the variances you calculated above in (2), prepare in as much detail as the data allow, a separate summary report similar to text Exhibit14.2.

Transcribed Image Text:

3. Interpretation of profit variances: a. total master (static) budget variance: this is the total operating profit variance for the period, ie., the difference between actual operating profit operating profit as stated in the master (static) budget. Notice that this variance is a function of five factors: selling price per unit, sales mix, sales volume variable cost per unit, and total fixed costs. We abstract in Chapter 14 from the multi-product case and deal only with a single-output context. Thus, w should be able to decompose any profit variance into variances related to the other four factors, as explained below b. total flexible-budget variance: this variance explains the portion of the total profit variance for the period related to a combination of three factors: selli price per unit, variable cost per unit, and total fixed costs. These variances, and the total flexible-budget variance by extension, are determined by hold constant sales volume. That is, actual operating results are compared to budgeted results flexed to the actual output level. c. flexible-budget variance for total variable cost: this variance represents one component of the total flexible-budget variance. That is, it represents th effect on operating profit of the variable cost per unit being different from planned. The variance can be broken be calculating a flexible-budget variance f each variable cost (e.g., by functional category) 1. flexible-budget variance for total variable manufacturing costs: this variance represents the portion of the flexible-budget variance that is attributablet variable manufacturing cost per unit being different from budgeted amount. As such, it can be further decomposed into a total variance for direct mat a total variance for direct labor, and a total variance for variable overhead (Chapter 15) 2. flexible-budget variance for total variable nonmanufacturing costs: this variance represents the portion of the flexible-budget variance that i attributable to nonmanufacturing cost per unit being different from budgeted amount. As such, it can be further decomposed into a total variance for eac nonmanufacturing cost element (e.g., selling expenses) d. flexible-budget variance for total fixed costs: this variance is also referred to as a spending variance, since it represents the difference between fixed costs and budgeted fixed costs. As such, the variance can be further broken down into functional categories, as explained below 1. flexible-budget variance for total fixed manufacturing costs: this is the portion of the flexible-budget variance for total fixed costs that is attributable to spending on fixed manufacturing costs being different from budgeted spending. As such, this variance can be further broken down on a line-item b (property taxes, depreciation, supervisory salaries, etc.) 2. flexible-budget variance for total fixed nonmanufacturing costs: this is the portion of the flexible-budget variance for total fixed costs that is attributabl to spending on nonmanufacturing fixed costs being different from budgeted spending. As such, this variance can be further broken down on a line-it basis (ie., sales salaries, depreciation, etc.)