Play Time Toys is organized into two major divisions: marketing and production. The production division is further divided into three departments: puzzles, dolls, and video games. Each production department has its own manager.

The company’s management believes that all costs must be covered by sales of the three product lines. Therefore, a portion of production division costs are allocated to each product line. The company’s accountant prepared the following variance report for the dolls production department.

REQUIRED

A. Is Play Time Toys using a static budget or a flexible budget to calculate variances? Explain.

Do you agree with this approach? Why or why not?

B. Develop a flexible budget for the actual sales of 1,100 units.

C. Use the benchmark you created in part (B) to calculate variances.

D. Review the variances from part (C). Briefly describe the types of operating or budgeting problems that might have caused these variances.

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PERFORMANCE REPORT: DOLLS PRODUCTION DEPARTMENT (Amounts in Thousands) Budget Per Unit Sales Volume Revenue Direct materials Direct labor Variable factory overhead Fixed factory overhead Production division overhead Budget 1,000 $12,000 2,000 1,000 1,000 800 100 7,100 Actual 1,100 $12,400 2,100 1,225 1,100 1,020 105 Variance 100 F $ 400 F (100) U (225) U (100) U (220) U $12.00 2.00 1.00 1.00 0.80 0.10 Operating income 7.10 00 6,850 $(250) U F-Favorable variance; U-Unfavorable variance