The computation of operating income for Frisco Company for 2013 follows: Sales $

Question

The computation of operating income for Frisco Company for 2013 follows: Sales $1,800,000 Cost of Goods manufactured and sold: Direct mateirals $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 Exepenses: 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 Material 444,000 Direct Labor 288,000 Variable manufacturing overhead 148,800 Fixed manufacturing overhead 246,000 Variable sellling exoenses 186,000 Fixed selling expenses 157,200 Variable administrative expenses 198,000 Fixed Administrative expenses. 218,200 a) Prepare a budget reprot 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 wew actually experiences. c) Comment on the differences revealed by the two reports. The computation of operating income for Frisco Company for 2013 follows: Sales $1,800,000 Cost of Goods manufactured and sold: Direct mateirals $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 Exepenses: 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 Material 444,000 Direct Labor 288,000 Variable manufacturing overhead 148,800 Fixed manufacturing overhead 246,000 Variable sellling exoenses 186,000 Fixed selling expenses 157,200 Variable administrative expenses 198,000 Fixed Administrative expenses. 218,200 a) Prepare a budget reprot 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 wew actually experiences. c) Comment on the differences revealed by the two reports.

Explanation / Answer

ANSWERS

(a.) The Budget report

Planned Operating budget

Actual data

Variance

Sales

$1800000

$2160000

$360000 F

Cost of goods manufactured and sold:

Direct materials

$360000

444000

84000 U

Direct labour

240000

288000

48000 U

Variable manufacturing overhead

120000

148800

28800 U

Fixed manufacturing overhead

240000

246000

6000 U

Gross margin

840000

1033200

193200 F

Selling expenses:

Variable

132000

186000

54000 U

Fixed

168000

157200

10800 F

540000

690000

150000 F

Administrative expenses:

Variable

156000

198000

42000 U

Fixed

192000

218200

26200 U

Net Operating Income

192000

273800

81800 F

(b). The Budget report

Standard data

Actual data

Variance

Sales

$2250000

$2160000

$90000 U

Cost of goods manufactured and sold:

The Direct materials

$450000

444000

6000 F

The Direct labour

300000

288000

12000 F

The Variable manufacturing overhead

150000

148800

1200 F

The Fixed manufacturing overhead

240000

246000

6000 U

The Gross margin

1110000

1033200

76800 U

The Selling expenses:

Variable

165000

186000

21000 U

Fixed

168000

157200

10800 F

777000

690000

87000 U

Administrative expenses:

Variable

195000

198000

3000 U

Fixed

216000

218200

2200 U

Net Operating Income

366000

273800

92200 U

(c)

This report prepared under option a. revealed the difference between the planned production/sales output and actual data. This report prepared under option b. revealed the difference between the standard results for actual production/sales output and actual data. The second report is a realistic comparison.

Planned Operating budget

Actual data

Variance

Sales

$1800000

$2160000

$360000 F

Cost of goods manufactured and sold:

Direct materials

$360000

444000

84000 U

Direct labour

240000

288000

48000 U

Variable manufacturing overhead

120000

148800

28800 U

Fixed manufacturing overhead

240000

246000

6000 U

Gross margin

840000

1033200

193200 F

Selling expenses:

Variable

132000

186000

54000 U

Fixed

168000

157200

10800 F

540000

690000

150000 F

Administrative expenses:

Variable

156000

198000

42000 U

Fixed

192000

218200

26200 U

Net Operating Income

192000

273800

81800 F

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