Birken Company manufactures shopping bags made of recycled plastic that it plans to sell for $ 5 each. Birken budgets production and sales of 800,000 bags for 2014, with a standard of 400,000 machine-hours for the whole year. Budgeted fixed overhead costs are $ 500,000, and variable overhead cost is $ 1.60 per machine-hour. Because of increased demand, Birken actually produced and sold 900,000 bags in 2014, using a total of 440,000 machine-hours. Actual variable overhead costs are $ 699,600 and actual fixed overhead is $ 501,900. Actual selling price is $ 6 per bag. Direct materials and direct labor actual costs were the same as standard costs, which were $ 1.20 per unit and $ 1.80 per unit, respectively.

Required

1. Calculate the variable overhead and fixed overhead variances (spending, efficiency, spending, and volume).

2. Create a chart like that in Exhibit showing Flexible Budget Variances and Sales Volume Variances for revenues, costs, contribution margin, and operating income.

3. Calculate the operating income based on budgeted profit per shopping bag.

4. Reconcile the budgeted operating income from requirement 3 to the actual operating income from your chart in requirement 2.

5. Calculate the operating income volume variance and show how the sales volume variance is com-posed of the production volume variance and the operating income volume variance.