This question focuses on analyzing variances, and is based on Exhibit 9-2 on p. 204 of the text. The Budget column on Exhibit 9-2 is what is known as a static analysis, because it is based on a fixed volume level (of 10,000 units). Create a flexible budget for the actual volume level by multiplying the standard sales price per unit times the actual volume for the sales, the standard cost per unit times the actual volume for the the variable costs and, for the semi-variable and fixed costs, the fixed cost plus (the variable component per unit (if any) times the actual volume). Then calculate the variances between the flexible budget amounts and the actual amounts and indicate whether the variance is favorable or unfavorable. Contrast this flexible budget view with the static budget (the original Exhibit 9.2). How is the message conveyed by the static budget and the flexible budget different?

Variable and Fixed Costs

Category Standard Variable per unit Fixed

Sales volume 1 Unit --

Sales price $50.00 --

Direct Material $5.00 --

Direct Labor $10.00 --

Factory Overhead $15.00 $40,000

Administration $2.00 $45,000

Distribution $3.00 $50,000

Exhibit 9.2

THE ESSENTIALS OF FINANCE AND ACCOUNTING FOR NONFINANCIAL MANAGERS Exhibit 9-2. Raritan Manufacturing Company Full Year Actual vs. Budget involves the determination of how this affected the rest of the business and whether the company's strategy (if there was one) improved the company's overall business performance (it did). Actual Difference Volume (units) Price Revenue Budget 10,000 $ 50.00 $500,000 11,000 $ 49.75 $547,250 1,000 $ 0.25 $47,250 Direct Material Costs: Direct Material Direct Labor Factory Overhead Administration Distribution Total Costs Profit $ 50,000 100,000 190,000 65,000 80,000 $485,000 $ 15,000 $ 52,250 111,000 195,000 64,000 80,000 $502,250 $ 45,000 $ 2,250 11,000 5,000 1,000 Direct material was budgeted at $50,000, or a variable cost of $5 per unit. Had the cost per unit remained at the budgeted level, the actual material cost would have amounted to $55,000. $ 30,000 Actual Volume Budgeted Cost per=Expected Unit Cost 11,000 x $5.00= $55,000 Price and Volume Since the actual cost per unit was $4.75 ($52,250/11,000), Raritan was apparently able to reduce its average material cost per unit by $0.25 compared with the budgeted level. Thus the company reduced cost and improved profit in this cost center by $2,250 because of efficiency. The explanations for how this may have been accomplished include the following: The product was sold at a price of $49.75 versus a budgeted price of $50.00. On the surface, this would appear to be an unfavorable event until you add in the fact that 11,000 units were sold compared with the budget of 10,000 units. While a higher price surely would be preferable, the additional units might not have been sold if the price had not been lowered. In fact, if the selling price had been held at $50.00, actual volume might have fallen below the budgeted amount. The price charged and the volume sold are not separate, isolated events. We therefore cannot evaluate them independently, out of context. Revenue amounted to $547,250, $47,250 above budget. While this in itself is certainly a positive outcome, the real analysis Purchasing larger quantities of product from vendors may have reduced acquisition costs. Longer production runs may have reduced the occurrence of machine setups, improving efficiency and reducing product waste. THE ESSENTIALS OF FINANCE AND ACCOUNTING FOR NONFINANCIAL MANAGERS Exhibit 9-2. Raritan Manufacturing Company Full Year Actual vs. Budget involves the determination of how this affected the rest of the business and whether the company's strategy (if there was one) improved the company's overall business performance (it did). Actual Difference Volume (units) Price Revenue Budget 10,000 $ 50.00 $500,000 11,000 $ 49.75 $547,250 1,000 $ 0.25 $47,250 Direct Material Costs: Direct Material Direct Labor Factory Overhead Administration Distribution Total Costs Profit $ 50,000 100,000 190,000 65,000 80,000 $485,000 $ 15,000 $ 52,250 111,000 195,000 64,000 80,000 $502,250 $ 45,000 $ 2,250 11,000 5,000 1,000 Direct material was budgeted at $50,000, or a variable cost of $5 per unit. Had the cost per unit remained at the budgeted level, the actual material cost would have amounted to $55,000. $ 30,000 Actual Volume Budgeted Cost per=Expected Unit Cost 11,000 x $5.00= $55,000 Price and Volume Since the actual cost per unit was $4.75 ($52,250/11,000), Raritan was apparently able to reduce its average material cost per unit by $0.25 compared with the budgeted level. Thus the company reduced cost and improved profit in this cost center by $2,250 because of efficiency. The explanations for how this may have been accomplished include the following: The product was sold at a price of $49.75 versus a budgeted price of $50.00. On the surface, this would appear to be an unfavorable event until you add in the fact that 11,000 units were sold compared with the budget of 10,000 units. While a higher price surely would be preferable, the additional units might not have been sold if the price had not been lowered. In fact, if the selling price had been held at $50.00, actual volume might have fallen below the budgeted amount. The price charged and the volume sold are not separate, isolated events. We therefore cannot evaluate them independently, out of context. Revenue amounted to $547,250, $47,250 above budget. While this in itself is certainly a positive outcome, the real analysis Purchasing larger quantities of product from vendors may have reduced acquisition costs. Longer production runs may have reduced the occurrence of machine setups, improving efficiency and reducing product waste