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Question 6 - Variance Analysis (15 marks) Assume that owners decided to go ahead with the Canmore expansion (first introduced in question 4). The junior accountant has prepared the following report to compare the static budget (from question 4) to the actual results. The owners have asked you to complete a variance analysis. 1 Required: Part A (4 marks)- Create a Static Budget Report Variance Analysis, indicating whether variances are favorable (F) or unfavorable (U). All variance amounts should be shown as positive numbers. 5 Static Budget Amount Variance Amount Favorable or Unfavorable Actual Results 7 Sales in Units 4,200 5,080 8 Sales 525,000 $ 609,600 9 Less: Variable Costs: 10 Cost of Goods Sold 225,000 222,000 11 Sales Commissions 78,750 79,248 12 Total Variable Costs 303,750 301,248 13 Contribution Margin 221,250 308,352 14 Less: Fixed Costs: 15 Total Costs 197,000 197,000 16 Net Operating Income 24,250 111,352 17 What is the weakness of using a static budget report to evaluate performance? (2 marks) 18 19 Required: Part B (6 marks) - The owners can see that the company sold a different amount of units than budgeted. They have asked you to create a flexible budget report. Variance Flexible Budget Amount Favorable (F) or Unfavorable (U) Actual Results Amount 4 Sales in Units 5,080 5 Sales 609,600 6 Less: Variable Costs: 7 Cost of Goods Sold 222,000 8 Sales Commissions 79,248 9 Total Variable Costs 301,248 0 Contribution Margin 308,352 1 Less: Fixed Costs 197,000 2 Net Operating Income 111,352 13 Management was pleased on the results based on the static budget report. Should they be pleased? What does the flexible 4 budget tell you? What are your recommendations to management based on the flexible budget report? (3 marks) 35