Chapter-7

7-23 Flexible-budget preparation and analysis. XYZ Printers, Inc., produces luxury checkbooks
with three checks and stubs per page. Each checkbook is designed for an individual customer and is
ordered through the customer’s bank. The company’s operating budget for September 2017 included
these data:

Number of checkbooks 20,000

Selling price per book $ 22
Variable cost per book $9
Fixed costs for the month $150,000
The actual results for September 2017 were as follows:

Number of checkbooks produced and sold 15,000

Average Selling price per book $ 23
Variable cost per book $8
Fixed costs for the month $155,000

The executive vice president of the company observed that the operating income for September was
much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-
budgeted variable cost per unit. As the company’s management accountant, you have been asked
to provide explanations for the disappointing September results.
XYZ develops its flexible budget on the basis of budgeted per-output-unit revenue and per-
output-unit variable costs without detailed analysis of budgeted inputs.

Required:
1. Prepare a static-budget-based variance analysis of the September performance.
2. Prepare a flexible-budget-based variance analysis of the September performance.
3. Why might XYZ printers find the flexible-budget-based variance analysis more informative
than the static-budget-based variance analysis? Explain your answer.

SOLUTION

(25–30 min.) Flexible-budget preparation and analysis.

1. Variance Analysis for XYZ Printers for September 2017

Level 1 Analysis
Actual Static-Budget Static
Results Variances Budget
(1) (2) = (1) – (3) (3)
Units sold 15,000 5,000 U 20,000
Revenue $345,000a $ 95,000 U $440,000c
Variable costs 120,000d 60,000 F 180,000f

7-1
 Contribution margin 225,000 35,000 U 260,000
Fixed costs 155,000 5,000 U 150,000
Operating income $ 70,000 $ 40,000 U $ 110,000

$40,000 U
Total static-budget variance
2. Level 2 Analysis

Flexible- Sales
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units sold 15,000 0 15,000 5,000 U 20,000
Revenue $345,000a $15,000 F $330,000b $110,000 U $440,000c
Variable costs 120,000d 15,000 F 135,000e 45,000 F 180,000f
Contribution margin 225,000 30,000 F 195,000 65,000 U 260,000
Fixed costs 155,000 5,000 U 150,000 0 150,000
Operating income $ 70,000 $25,000 F $ 45,000 $65,000 U $ 110,000
$25,000 F $65,000 U
Total flexible-budget Total sales-volume
variance variance
$40,000 U
Total static-budget variance
a
15,000 × $23 = $345,000 d 15,000 × $8 = $120,000
b
15,000 × $22 = $330,000 e 15,000 × $9 = $135,000
c
20,000 × $22 = $440,000 f 20,000 × $9 = $180,000

3. Level 2 analysis breaks down the static-budget variance into a flexible-budget variance and
a sales-volume variance. The primary reason for the static-budget variance being unfavorable
($40,000 U) is the reduction in unit volume from the budgeted 20,000 to an actual 15,000. One
explanation for this reduction is the increase in selling price from a budgeted $22 to an actual $23.
Operating management was able to reduce variable costs by $15,000 relative to the flexible budget.
This reduction could be a sign of efficient management. Alternatively, it could be due to using
lower quality materials (which in turn adversely affected unit volume).

7-2
7-27 Materials and manufacturing labor variances. Consider the following data
collected for Theta Homes, Inc.:
Direct
Direct Manufacturing
Materials Labor
Cost incurred: Actual inputs × actual prices $ 150,000 $100,000
Actual inputs × standard prices 162,000 95,000
Standard inputs allowed for actual output × standard 168,000 90,000
prices

Required:
Compute the price, efficiency, and flexible-budget variances for direct materials and direct
manufacturing labor.

SOLUTION

(15 min.) Materials and manufacturing labor variances.

Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Direct $150,000 $162,000 $168,000
Materials
$12,000 F $6,000 F
Price variance Efficiency variance

$18,000 F
Flexible-budget variance

Direct $100,000 $95,000 $90,000

Mfg. Labor $5,000 U $5,000 U
Price variance Efficiency variance

$10,000 U
Flexible-budget variance

7-3