^{FLEXIBLE BUDGETING CASE - ACTIVITY VERSUS SPENDING VARIANCES}

Due to global warming, demand for milk shares was much larger than expected. The amount of large milk shakes actually sold in January were 85,000 (10,000 over budget) while the amount of small milk shakes actually sold in January were 45,000 (5,000 under budget). The budgets prepared above were planned prior to the beginning of the year and are valid for the planned level of sales activity. If the actual level of sales activity differs from the planned level, comparing our budgets above with actual results may lead to incorrect conclusions about performance. Therefore we must use a FLEXIBLE budget that adjusts revenues and expenses given the actual level of sales activity that occurred.

(1) Fill in the Flexible budget based on actual sales for both size milk shakes. This is calculated by using the ACTUAL sales volume times the standard amount)

(2)Fill in the activity variance (difference between planned budget and flexible budget) and the spending variance (difference between flexible budget and actual budget) amounts as well as indicate whether they are favorable or unfavorable for both size milk shakes.

Large Milk Shakes - Flexible Budget Performance Report for the Month ended January 31
	Planned Budget based on budgeted sales of 75,000 milk shakes	Activity Variances	Flexible budget based on actual sales of 85,000 milk shakes	Spending Variances	Actual results based on actual sales of 85,000 milk shakes
Revenue ($9.00q)	$675,000				$765,000
Less: Cost of goods sold ($2.81q)	$210,750				$220,000
Gross Profit	$464,250				$545,000
Less: Operating expenses	8,764				10,317
Operating Income	$455,486				$534,683
Income tax expense (tax rate = 35%)	$159,420				$187,139
Net Income	$296,066				$347,544

Small Milk Shakes - Flexible Budget Performance Report for the Month ended January 31
	Planned Budget based on budgeted sales of 50,000 milk shakes	Activity Variances	Flexible budget based on actual sales of 45,000 milk shakes	Spending Variances	Actual results based on actual sales of 45,000 milk shakes
Revenue ($6.30q)	$315,000				$283,500
Less: Cost of goods sold ($2.18q)	$109,000				$100,500
Gross Profit	$206,000				$183,000
Less: Operating expenses	5,843				5,928
Operating Income	$200,157				$177,072
Income tax expense (tax rate = 35%)	$70,055				$61,975
Net Income	$130,102				$115,097