Bugout Pesticides Inc. established the following standard price and costs for a termite control product that it sells to exterminators.

The 2006 master budget was established at an expected volume of 25,000 units. Actual production and sales volume for the year was 26,000 units.

Required

a. Prepare the pro forma income statement for Bugout’s 2006 master budget.

b. Prepare a flexible budget income statement at the actual volume.

c. Determine the sales activity (volume) variances and indicate whether they are favorable or unfavorable. Comment on how Bugout would use the variances to evaluate performance.

d. Determine the flexible budget variances and indicate whether they are favorable or unfavorable.

e. Identify the two variances Bugout is most likely to analyze further. Explain why you chose these two variances. Who is normally responsible for the variances you chose to investigate?

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Variable price and cost data (per unit) Standard Actual Sales price $52.00 $49.00 Materials cost 10.00 10.66 Labor cost 12.00 11.90 Overhead cost 7.00 7.05 General, selling, and administrative (G, S, & A) cost 8.00 7.92 Expected fixed costs (in total) Manufacturing General, selling, and administrative $150,000 $140,000 60,000 64,000