LakeMaster Company manufactures outboard motors that are sold throughout the United States and Canada. The company uses a comprehensive budgeting process and compares actual results to budgeted amounts on a monthly basis. Each month, LakeMaster’s accounting department prepares a variance analysis and distributes the report to all responsible parties. Al Richmond, production manager, is upset about the results for June. Richmond, who is responsible for the cost of goods manufactured, has implemented several cost-cutting measures in the manufacturing area and is discouraged by the unfavorable variance in variable costs.

When the master budget was prepared, LakeMaster’s cost accountant, Joan Ballard, supplied the following unit costs: direct material, $90; direct labor, $66; variable overhead, $54; and variable selling, $18.
The total variable costs of $1,170,000 for June include $480,000 for direct material, $288,000 for direct labor, $264,000 for variable overhead, and $138,000 for variable selling expenses. Ballard believes that monthly reports would be more meaningful to everyone if the company adopted flexible budgeting and prepared more detailed analyses.

Required:
1. Prepare a flexible budget for LakeMaster Company for the month of June that includes separate variable-cost budgets for each type of cost (direct material, etc.).
2. Determine the variance between the flexible budget and actual cost for each cost item.
3. Discuss how the revised budget and variance data are likely to impact the behavior of Al Richmond, the production manager.
4. Construct an Excel spreadsheet to solve requirements (1) and (2) above. Show how the solution will change if the following information changes: actual sales amounted to 4,700 units and actual fixed overhead was $272,000.
(CMA,adapted)

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LAKEMASTER COMPANY Operating Results For the Month of June Budget Actual Variance Units sold.. Revenue.. Variable cost 200 U $72,000 U 30,000 U $102,000 U 5,000 4,800 $1,728,000 72 $1,800,000 1.140,000 660,000 270,000 180,000 $210,000 1,170,000 $ 558,000 270,000 172,500 $115,500 Contribution margin Fixed overhead. Fixed general and administrative cost 7,500 F Operating income $94,500 U