Problem: Prepare a flexible operating budget
The computation of operating income for Frisco Company for 2013 follows:
|
Sales
|
|
1,800,000
|
|
Cost of goods manufactured and sold:
|
|
Direct materials
|
360,000
|
|
|
Direct labor
|
240,000
|
|
|
Variable manufacturing overhead
|
120,000
|
|
|
Fixed manufacturing overhead
|
240,000
|
960,000
|
|
Gross margin
|
|
840,000
|
|
Selling expenses:
|
|
Variable
|
$132,000
|
|
|
Fixed
|
168,000
|
300,000
|
|
|
540,000
|
|
Administrative expenses:
|
|
Variable
|
$156,000
|
|
|
Fixed
|
192,000
|
348,000
|
|
Net operating income
|
|
192,000
|
An operating budget is prepared for 2014 with sales forecasted at a 25% increase in volume. Direct materials, direct labor, and all costs labeled as variable are completely variable. Fixed costs are expected to continue except for a $24,000 increase in fixed administrative costs. Actual operating data for 2014 are:
|
Sales
|
$2,160,000
|
|
Direct materials
|
444,000
|
|
Direct labor
|
288,000
|
|
Variable manufacturing overhead
|
148,800
|
|
Fixed manufacturing overhead
|
246,000
|
|
Variable selling expenses
|
186,000
|
|
Fixed selling expenses
|
157,200
|
|
Variable administrative expenses
|
198,000
|
|
Fixed administrative expenses
|
218,200
|
a. Prepare a budget report comparing the 2014 planned operating budget with actual 2014 data.
b. Prepare a budget report that would be useful in appraising the performance of the various persons charged with responsibility to provide satisfactory income. (Hint: Prepare budget data on a flexible basis and use the percentage by which sales were actually experienced.)
c. Comment on the differences revealed by the two reports.