^{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 prepare a FLEXBLE budget that adjusts revenues and expenses given the actual level of sales activity that occurred.

Please (1) Fill in the Flexible budget based on actual sales for both size milk shakes.

(2) Fill in the activity variance and the spending variance 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

1. Remember in the flexible budget column multiply actual sales by the budget/stardard cost of which I gave you in one number Cost of goods sold.
2. Operating expenses remain the same between the static and flexible budget as they do not change with changes in volume (sales level).

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

So what is the BUDGETED MANUFACTURING COST FOR ONE UNIT: Direct Materials Variable Costs per unit: Ingredient Cost Small Large Whole milk $15 for 640 oz. 0.02344 per oz. 0.05 0.07 Cream $20 for 128 oz. 0.15625 per oz. 0.31 0.47 Sugar $10 for 30 cups 0.33333 per cup 0.17 0.25 Premium Vanilla Ice Cream $24 for 600 oz. 0.04000 per oz. 0.24 0.36 Flavorings 0.25 0.40 Flavored Specialty Straws 0.75 0.75 Cups-8 ounces $200 for 500 cups 0.40000 per cup 0.40 Cups-12 ounces $250 for 500 cups 0.50000 per cup 0.50 TOTAL DIRECT MATERIAL COST PER UNIT $2.17 $2.80 LARGE MILK SHAKES per the PRODUCTION budget we expect to produce 1,580,000 in the first Year: (125,000+125,000+150,000+125,000+125,000+150,000+160,000+150,000+110,000+110,000 +110,000+140,000). (1) Direct materials cost per milk shake: 2.80 (2) Manufacturing overhead: Fixed ($2,234.00 *12months * 60% per quarter)/1,580,000 = milk shakes 001. Cost of manufacturing each large milk shake $2.81 SMALL MILK SHAKES - per the PRODUCTION budget we expect to produce 165,000 in the first quarter. (1) Direct materials cost per milk shake: 2.17 (2) Manufacturing overhead: Fixed ($2,234.00 * 12 months * 40% per quarter)/ 1,580,000 = milk shakes Cost of manufacturing each small milk shake 001 II $2.18