Doug\'s Diner is planning to expand operations and is concerned that its reporti

Question

Doug's Diner is planning to expand operations and is concerned that its reporting system might need improvement. The master budget income statement for the Downtown Doug's, which contains a delicatessen and restaurant operation, follows (in thousands) Delicatessen Restaurant Total $600 $ 2,000 S 2,600 Sales revenue Costs Purchases Hourly wages Franchise fee Advertising Utilities Depreciation Lease cost Salaries 1,460 469 56 150 105 63 40 40 360 30 1,100 439 38 100 63 38 25 25 50 42 25 $555 $ 45 Total costs Operating profit $ 172 S 217

Explanation / Answer

*Calculations for Variable cost of Flexible budget: (on actual units)

Ans. Actual Purchase Variances Marketing & Flexible Budget Activity Variance Master budget Sales revenue 700 Administrative Variances 700 600 Variable costs: Purchases 450 30 U 420 60 U 360 Hourly wages 35 0 no effect 35 5 U 30 Franchise fee 21 0 no effect 21 3 U 18 Utilities 43 6 F 49 7 U 42 Total variable costs 549 30 U 6 F 525 75 U 450 Contribution margin 151 30 U 6 F 175 25 F 150 Fixed costs: Advertising 50 50 0 no effect 50 Depreciation 25 25 0 no effect 25 Lease 15 15 0 no effect 15 Salaries 15 15 0 no effect 15 Total Fixed costs 105 105 0 no effect 105 Operating profit 46 30 U 6 F 70 25 F 45

*Calculations for Variable cost of Flexible budget: (on actual units)

Sales revenue 700 Purchases 360/600*700 Hourly wages 30/600*700 Franchise fee 18/600*700 Utilities 42/600*700 *Purchase Variance = Actual purchase - Flexible purchase 450 - 420 U Increase in cost = Unfavorable. *Marketing & Administrative Variance:   Actual - Flexible Hourly wages 35 - 35 0 no effect Franchise fee 21 - 21 0 no effect Utilities 43 - 49 6 Favorable Decrease in cost = Favorable. *Activity variance = Flexible budget - Master budget

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