Diaz Credit Services produces reports for consumers
about their credit ratings. The company’s standard contribution margins
average 70 percent of dollar sales and average selling prices are $50 per
report. Average productivity is four reports per hour. Some preparers work for
sales commissions and others for an hourly rate. The master budget for 2006
had predicted sales of 800,000 reports, but only 700,000 reports were
processed.
Fixed costs of rent, supervision, advertising, and other items were budgeted
at $21.5 million, but the budget was exceeded by $700,000 because of extra
advertising in an attempt to boost revenue.
There were no variances from the average selling prices, but the actual
commissions paid to preparers and the actual productivity per hour resulted in
flexible-budget variances (that is, total price and efficiency variances) for variable
costs of $900,000 unfavourable.
The president was unhappy because the budgeted operating income of
$6.5 million was not achieved. He said, “Sure, we had unfavourable variable cost
variances, but our operating income was down far more than that. Please explain
why.”
Explain why the budgeted operating income was not attained. Use a presentation
similar to Exhibit 12-5. Enough data have been given to permit you
to construct the complete exhibit by filling in the known items and then computing
the unknown. Complete your explanation by briefly summarizing what
happened.