Exercise 14-25 Flexible Budgets and the Breakdown of the Total Operating Income Variance [LO 14-2, 14-3]

Assume that in October 2019 the Schmidt Machinery Company (Exhibit 14.1) manufactured and sold 970 units for $837 each. During this month, the company incurred $499,550 total variable costs and $180,200 total fixed costs. The master (static) budget data for the month are as given in Exhibit 14.1.

Required:

1. Prepare a flexible budget for the production and sale of 970 units.

2. Compute for October 2019:

a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable (F) or unfavorable (U).

b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable (F) or unfavorable (U).

3. Compute for October 2019:

a. The total flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

b. The total variable cost flexible-budget variance. Indicate whether this variance was favorable (F) or unfavorable (U).

c. The total fixed cost flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

d. The selling price variance. Indicate whether this variance was favorable (F) or unfavorable (U).

• Required 1

Prepare a flexible budget for the production and sale of 970 units.

Units sold
Sales
Variable expenses
Contribution margin	$0
Fixed expenses
Budgeted operating income	$0

• Required 2

Compute for October 2019:

a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable (F) or unfavorable (U).

b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable (F) or unfavorable (U).

	Sales Volume Variance
Operating income
Contribution margin

• Required 3

Compute for October 2019:

a. The total flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

b. The total variable cost flexible-budget variance. Indicate whether this variance was favorable (F) or unfavorable (U).

c. The total fixed cost flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U).

d. The selling price variance. Indicate whether this variance was favorable (F) or unfavorable (U).

a.	The total flexible-budget (FB) variance
b.	The total variable cost flexible-budget variance
c.	The total fixed cost flexible-budget (FB) variance
d.	The selling price variance

EXHIBIT 14.1 Comparison of Actual and Budgeted Operating Income (3) Variances SCHMIDT MACHINERY COMPANY Analysis of Operating Income For October 2019 (1) (2) Actual Operating Income Master (Static) Budget Units 1,000 Sales $639.600 100% $800,000 100% Variable costs 350.950 55 450,000 Contribution margin $288,650 45% $350,000 44% Fixed costs 25 150,000+ 19 Operating income $128,000 20% $200,000 25% 780 2200 $ 160,400U 56 99,050F $ 61,350U 160.650*** 10,650U $ 72,000U *U denotes an unfavorable effect on operating income. **F denotes a favorable effect on operating income. ***Actual fixed factory overhead cost = $130,650; actual fixed selling and administrative costs = $30,000. #Budgeted fixed factory overhead cost = $120,000; budgeted fixed selling and administrative costs = $30,000