Flexible budgeting case - activity versus spending variances

Due to global warming, demand for milk shares was much larger than expected. The amount of large milk shakes actually sold in January were 85,000 (10,000 over budget) while the amount of small milk shakes actually sold in January were 45,000 (5,000 under budget). The budgets prepared above were planned prior to the beginning of the year and are valid for the planned level of sales activity. If the actual level of sales activity differs from the planned level, comparing our budgets above with actual results may lead to incorrect conclusions about performance. Therefore we must prepare a FLEXBLE budget that adjusts revenues and expenses given the actual level of sales activity that occurred.

Please Fill in the Flexible budget based on actual sales for both size milk shakes.

Fill in the activity variance and the spending variance amounts as well as indicate whether they are favorable or unfavorable for both size milk shakes.

Large Milk Shakes - Flexible Budget Performance Report for the Month ended January 31

Planned Budget based on budgeted sales of 75,000 milk shakes

Activity Variances

Flexible budget based on actual sales of 85,000 milk shakes

Spending Variances

Actual results based on actual sales of 85,000 milk shakes

Revenue ($9.00q)

$675,000

$765,000

Less: Cost of goods sold ($2.81q)

$210,750

$220,000

Gross Profit

$464,250

$545,000

Less:  Operating expenses

8,764

10,317

Operating Income

$455,486

$534,683

Income tax expense (tax rate = 35%)

$159,420

$187,139

Net Income

$296,066

$347,544

Small Milk Shakes - Flexible Budget Performance Report for the Month ended January 31

Planned Budget based on budgeted sales of 50,000 milk shakes

Activity

Variances

Flexible budget based on actual sales of 45,000 milk shakes

Spending

Variances

Actual results based on actual sales of 45,000 milk shakes

Revenue ($6.30q)

$315,000

$283,500

Less: Cost of goods sold ($2.18q)

$109,000

$100,500

Gross Profit

$206,000

$183,000

Less:  Operating expenses

5,843

5,928

Operating Income

$200,157

$177,072

Income tax expense (tax rate = 35%)

$70,055

$61,975

Net Income

$130,102

$115,097