D E F 1 Question 6 - Variance Analysis (20 marks) 2 Assume that owners decided to go ahead with the Canmore expansion (first introduced in question 4). The junior accountant has prepared the following report to compare the static budget (from question 4) to the actual results. The owners have asked you to complete a variance analysis. 3 4 Required: Part A-Create a Static Budget Report Variance Analysis, indicating whether variances are Favorable or Unfavorable ( marks). All variance amounts should be shown as positive numbers. 5 Static Budget Amount Variance Actual Results Amount Favorable or Unfavorable 6 7 Sales in Units 4,240 4,830 8 Sales $ 530,000 $ 579,600 9 Less: Variable Costs: 10 Cost of Goods Sold 218,000 220,000 11 Sales Commissions 63,600 81,144 12 Total Variable Costs 281,600 301,144 13 Contribution Margin 400 278,456 14 Less: Fixed Costs: 15 Advertising 22,000 21,000 16 Property Taxes 9,000 10,000 17 Rent 46,000 45,000 18 Salaries & Wages 103,000 108,000 19 Total Fixed Costs 180,000 184,000 20 Net Operating Income 68,400 94,456 21 Discuss the variances you've identified in the static budget report (i.e. what are potential causes of the variances?) What is the weakness of using a static budget report to evaluate performance? (2 marks) 22 23 24 Required: Part B The owners can see that the company sold a different amount of units than budgeted. They have asked you to 25 create a flexible budget report (9 marks). 23 24 Required: Part B The owners can see that the company sold a different amount of units than budgeted. They have asked you to 25 create a flexible budget report (9 marks). 26 Flexible Budget Variance Favorable (F) or 27 Amount Actual Results Amount Unfavorable (U) 28 Sales in Units 4,830 29 Sales 579,600 30 Less: Variable Costs: 31 Cost of Goods Sold 220,000 32 Sales Commissions 81,144 301,144 33 Total Variable Costs 34 Contribution Margin 278,456 35 Less: Fixed Costs: 36 Advertising Find & Select 37 Property Taxes IU,UUU 38 Rent 45,000 39 Salaries & Wages 108,000 40 Total Fixed Costs 184,000 94,456 41 Net Operating Income 42 Management was pleased on the results based on the static budget report. Should they be pleased? What does the flexible 43 budget tell you? What are your recommendations to management based on the flexible budget report? (3 marks) 44 45 46