Question

The following data are for the month of January for the Submissive Company, a maker of boots:

Master-budget data:	Actual results:
Sales of 30,000 pairs at $70 per pair	Sales of 32,000 pairs at $68 per pair
variable costs of $45 per pair;	variable costs of $48 per pair;
$250,000 total fixed costs	$238,000 total fixed costs

(Show Workings)

a) Calculate the operating income under flexible budget.

b) Assume that ACTUAL operating income is $405,000, and master budgeted operating income is $503,000. Calculate the January Sales activity variance at operating income (indicate F or U)

Answer:

Answer 1

Ans. A		Flexible budget
	Sales (32,000 * $70)	$2,240,000
	Less: Variable cost (32,000 * $45)	-$1,440,000
	Contribution margin	$800,000
	Less: Fixed cost	-$250,000
	Operating Income	$550,000
	*Flexible budget is prepared on the basis of actual units.
	*Fixed expenses in flexible budget remain same as fixed budget.
Ans. B	Sales activity variance = Flexible budgeted operating income - Master budgeted operating income
	$550,000 - $503,000
	$47,000	Favorable
	*Flexible income is greater than the budgeted, so the variance is favorable.