Refer to the data in Exhibits 8.1 and 8.2. Suppose actual production and sales were 8,500 units instead of 7,000 units; actual variable costs were €188,800; and actual fixed costs were €71,200. The selling price remained at €31 per unit.

Exhibit 8.1

Exhibit 8.2

1. Compute the static-budget variance for income. What does this tell you about the efficiency of operations? The effectiveness of operations?

2. Compute the sales-activity variance for income. Is the performance of the marketing function the sole explanation for this variance? Why?

3. Using a flexible budget at the actual activity level, compute the budgeted contribution margin, budgeted income and flexible-budget variance for income. What do you learn from this variance?

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Units Sales Variable costs Variable manufacturing costs Shipping costs (selling) Administrative costs Total variable costs Contribution margin Fixed expenses Fixed manufacturing costs Fixed selling and administrative costs Total fixed costs Operating income (loss) Actual (1) 7,000 €217,000 €151,270 5,000 2,000 €158,270 € 58,730 € 37,300 33,000 € 70,300 €(11,570) Static budget (2) 9,000 €279,000 €189,000 5,400 1,800 €196,200 € 82,800 € 37,000 33,000 € 70,000 € 12,800 Static budget variances (3) 2,000 U €62,000 U €37,730 F 400 F 200 U €37,930 F €24,070 U € 300 U € 300 U €24,370 U U = Unfavourable cost variances occur when actual costs are more than budgeted costs. Unfavourable revenue (or profit) variances occur when actual revenues (or profits) are less than budgeted. F = Favourable cost variances occur when actual costs are less than budgeted costs. Favourable revenue (or profit) variances occur when actual revenues (or profits) are more than budgeted.