Question

As sales manager, Joe Batista was given the following static budget report for selling expenses in the Clothing Department of Soria Company for the month of October.
SORIA COMPANY
Clothing Department
Budget Report
For the Month Ended October 31, 2017
Difference Favorable Unfavorable Neither Favorable nor Unfavorable
Budget Actual
Sales in units 8,400 9,000 600 Favorable
Variable expenses
Sales commissions $1,680 $2,430 $750 Unfavorable
Advertising expense 1,176 810 366 Favorable
Travel expense 4,032 3,150 882 Favorable
Free samples given out 1,680 990 690 Favorable
Total variable 8,568 7,380 1,188 Favorable
Fixed expenses
Rent 1,800 1,800 –0– Neither Favorable nor Unfavorable
Sales salaries 1,100 1,100 –0– Neither Favorable nor Unfavorable
Office salaries 600 600 –0– Neither Favorable nor Unfavorable
Depreciation—autos (sales staff) 500 500 –0– Neither Favorable nor Unfavorable
Total fixed 4,000 4,000 –0– Neither Favorable nor Unfavorable
Total expenses $12,568 $11,380 $1,188 Favorable
As a result of this budget report, Joe was called into the president's office and congratulated on his fine sales performance. He was reprimanded, however, for allowing his costs to get out of control. Joe knew something was wrong with the performance report that he had been given. However, he was not sure what to do, and comes to you for advice.
Required:
1. Prepare a budget report based on flexible budget data to help Joe. (List variable costs before fixed costs.)

Answer 1

Answer:

SORIA COMPANY

Clothing Department

Flexible Budget Report

For the Month Ended October 31, 2017

See attachment.

In flexible budgeting, the fixed costs are assumed to be constant within the relevant range.  Only the variable costs are flexed.

Workings:

1. Sales Commission = $1,680/8,400 x 9,000 = $1,800

2. Advertising = $1,176/8400 x 9,000 = $1,260

3. Travel Expense = $4,032/8,400 x 9,000 = $4,320

4. Free Samples = $1,680/8,400 x 9,000 = $1,800

Explanation:

The flexible budget is one that flexes the activity level or volume in order to recognize changes that may arise.  This changes the base volume of the variable costs.

To achieve this, the value under the static budget is divided by the static budget volume and multiplied by the flexed budget volume(s).

In this case, when the budget was flexed from the static sales volume of 8,400 to 9,000 in accordance with the actual volume achieved, the favorable value was increased from $1,188 to $1,800 more than 50% increase.

The implication is that a flexible budget helps to better evaluate performance than its opposite, the static budget.