David Catrow is the manufacturing production supervisor for Zachary Motor Works,

Question

David Catrow is the manufacturing production supervisor for Zachary Motor Works, a company that manufactures electrical motors for industrial applications. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife, “This is the dumbest place I've ever worked. Last year the company set up this budget assuming it would sell 150,000 units. Well, it sold only 140,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 150,000 units goal and it sells 162,000. The company’s making all kinds of money. You’d think I’d get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if I’d stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I've ever worked.”

Zachary’s master budget and the actual results for the most recent year of operating activity follow:

Prepare a flexible budget and recompute the budget variances.

Master Budget Actual Results Variances F or U Number of units 150,000 162,000 12,000 Sales revenue $ 32,100,000 $ 35,154,000 $ 3,054,000 F Variable manufacturing costs Materials (4,800,000 ) (5,224,500 ) 424,500 U Labor (4,650,000 ) (4,987,980 ) 337,980 U Overhead (1,800,000 ) (1,969,920 ) 169,920 U Variable selling, general and administrative costs (4,950,000 ) (5,299,020 ) 349,020 U Contribution margin 15,900,000 17,672,580 1,772,580 F Fixed costs Manufacturing overhead (7,800,000 ) (7,700,000 ) 100,000 F Selling, general and administrative costs (7,696,000 ) (7,806,000 ) 110,000 U Net income $ 404,000 $ 2,166,580 $ 1,762,580 F

Prepare a flexible budget and recompute the budget variances.

Flexible Budget Actual Results Variances Number of Units 162,000 Sales revenue $35,154,000 Variable manufacturing costs Materials (5,224,500) Labor (4,987,980) Overhead (1,969,920) Variable Selling, general & administrative (5,299,020) Contribution margin 17,672,580 Fixed costs Manufacturing overhead (7,700,000) Selling, general & administrative (7,806,000) Net income $2,166,580

Explanation / Answer

Flexible Actual Variances Budget results Number of units 162,000 162,000 0 Sales revenue 34668000 35,154,000 486,000 F Variable manufacturing costs Materials -5184000 -5,224,500 40,500 U labor -5022000 -4,987,980 34,020 F overhead -1944000 -1,969,920 25,920 U Variable Selling,general & administrative -5346000 -5,299,020 46,980 F Contribution margin 17172000 17,672,580 500,580 U fixed costs Manufacturing overhead -7,800,000 -7,700,000 100,000 F Selling,general & administrative -7,696,000 -7,806,000 110,000 U Net income 1676000 2,166,580 490,580 F

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