Chapter 14: Discussion Forum 1- Operational Performance Measurement: Sales, Direct Cost Variances and the role of nonfinancial performance measures

Your Client, a customized tile manufacturer asked you to explain the company's variance based on his master budget for the month. He projected 9,200 tiles for the month. The tiles have a selling price of $54 each and variable manufacturing and selling costs are $21.60. Fixed manufacturing costs were budgeted at $125,000 and fixed selling expense was $35,000 for the month.

The actual results were as follows:

The company produced and sold 10,300 tiles at a unit price of $53.00 per tile. Variable manufacturing costs due to material shortages shot up to $24 per tile and fixed manufacturing costs were $119,000 and fixed selling expense was $38,000 for the month.

Your client stated that the actual income from operations for the month was $141,700 vs, budget of $138,080. "This was a better month than I thought. Rising material costs were likely to show less income from opts but we managed to exceed budget by $3,620.

For your discussion, build a flexible budget with the facts above. Explain to your client that the $3,620 favorable variance is not the best way to approach actual to budget comparisons. Specifically identify the:

A) Flexible Budget variance or price variance and if it was favorable or unfavorable. Explain the reason for the favorable or unfavorable results.

B) Discuss the quantity variance in your results. Discuss if this variance was favorable or unfavorable and address the reasons.

C) Summarize the two variances and discuss with your client why he should start using the flexible budget format to get a better picture of his results to budget.