Question

The master budget at Western Company last period called for sales of 225,000 units at $9 each. The costs were estimated to be $3.75 variable per unit and $225,000 fixed. During the period, actual production and actual sales were 230,000 units. The selling price was $9.10 per unit. Variable costs were $4.50 per unit. Actual fixed costs were $225,000.


Required: Prepare a profit variance analysis. (Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Answer 1

Answer:

The operating profit under actual budget gives $833,000 while flexible budget gives $982,500 which results in an unfavorable variance of $149,500

Explanation:

In computing the final variance  I started with sales revenue for the actual production and sales of 230,000 under both actual and flexed budgets.

This approach implies that the original budget was revised to reflect actual quantity produced and sold but the budgeted amounts  were used under flexed budget  while the actual amounts were applied under the actual budget preparation.

Find the details in the attached.

Answer 2

Answer

Western Company

Profit Variance Analysis

(A) Flexible budget -Master budget(C)= Sales activity variance (B)

(Flexible budget) A

Sales Revenue $2,070,000

Less:Variable cost $862,500

Contribution margin $1,207,500

Less: Fixed cost $225,000

0perating profits $982,500

(Sales Activities Variance) B

Sales Revenue $45,000 F

Less:Variable cost $18,750 U

Contribution margin $26,250 F

Less: Fixed cost $0

0perating profits $26,250 F

(Master Budget) C

Sales Revenue $2,025,000

Less:Variable cost $843,750

Contribution margin $1,181,250

Less: Fixed cost $225,000

0perating profits $956,250

Explanation:

1.Sales Revenue;

$225,000×$9= $2,025,000(Master budget)

$230,000×$9=$2,070,000( Flexible budget)

$2,070,000-$2,025,000=$45,000 Sales Activities Variance

Variable cost

$225,000×$3.75= $843,750 (Master budget)

$230,000×$3.75= $862,500(Flexible budget)

$862,500-$843,750=$18,750 Sales Variance

3. Sales Revenue- Variable cost= Contribution Margin

4. Contribution Margin- Fixed cost = Operating Profits.