Great ​Bubbles, Inc. produces multicolored bubble solution used for weddings and other events. The company sold 70,000 bubble kits during August​, and its actual operating income was as​ follows:   Data table:   Great Bubbles, Inc. Income Statement Month Ended August 31 Sales revenue. . . . . . . . . . . . . . . . $214,500 Variable expenses:   Cost of goods sold. . . . . $84,100 Sales commissions. . . . 19,000 Utility expense. . . . . . . . 10,500 Fixed expenses:   Salary expense. . . . . . . 35,100 Depreciation expense. . . 18,000 Rent expense. . . . . . . . . 8,850 Utility expense. . . . . . . . 6,000 Total expenses. . . . . . . . . . . . . . . $181,550 Operating income. . . . . . . . . . . . . $32,950   The​ company's flexible budget income statement for August follows: Data table:   Great Bubbles, Inc. Flexible Budget Income Statement Month Ended August 31     Flexible           Budget           per Output           Unit Output Units (Kits)       65,000 70,000 75,000   Sales revenue $2.95 $191,750 $206,500 $221,250   Variable expenses:           Cost of goods sold 1.20 78,000 84,000 90,000   Sales commissions 0.25 16,250 17,500 18,750   Utility expense 0.15 9,750 10,500 11,250   Fixed expenses:           Salary expense   33,000 33,000 36,300   Depreciation expense   18,000 18,000 20,700   Rent expense   9,000 9,000 13,000   Utility expense   6,000 6,000 6,000   Total expenses   $170,000 $178,000 $196,000   Operating income   $21,750 $28,500 $25,250   Requirements:   1. Prepare an income statement performance report for August.​Note: The master budget was based on expected sales volume of 65,000 bubble kits. 2. What accounts for most of the difference between actual operating income and master budget operating​ income? 3. What is Great​ Bubbles' master budget variance for operating​ income? Explain why the income statement performance report provides Great Bubbles' managers with more useful information than the simple master budget variance. What insights can Great Bubbles' managers draw from this performance​ report?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Great ​Bubbles, Inc. produces multicolored bubble solution used for weddings and other events. The company sold
70,000 bubble kits during August​, and its actual operating income was as​ follows:
 
Data table:
 
Great Bubbles, Inc.
Income Statement
Month Ended August 31
Sales revenue. . . . . . . . . . . . . . . .
$214,500
Variable expenses:
 
Cost of goods sold. . . . .
$84,100
Sales commissions. . . .
19,000
Utility expense. . . . . . . .
10,500
Fixed expenses:
 
Salary expense. . . . . . .
35,100
Depreciation expense. . .
18,000
Rent expense. . . . . . . . .
8,850
Utility expense. . . . . . . .
6,000
Total expenses. . . . . . . . . . . . . . .
$181,550
Operating income. . . . . . . . . . . . .
$32,950

 

The​ company's flexible budget income statement for August follows:

Data table:
 
Great Bubbles, Inc.
Flexible Budget Income Statement
Month Ended August 31
   
Flexible
 
   
   
Budget
 
   
   
per Output
 
   
 
 
Unit
Output Units (Kits)
 
   
65,000
70,000
75,000
 
Sales revenue
$2.95
$191,750
$206,500
$221,250
 
Variable expenses:
 
 
 
 
 
Cost of goods sold
1.20
78,000
84,000
90,000
 
Sales commissions
0.25
16,250
17,500
18,750
 
Utility expense
0.15
9,750
10,500
11,250
 
Fixed expenses:
 
 
 
 
 
Salary expense
 
33,000
33,000
36,300
 
Depreciation expense
 
18,000
18,000
20,700
 
Rent expense
 
9,000
9,000
13,000
 
Utility expense
 
6,000
6,000
6,000
 
Total expenses
 
$170,000
$178,000
$196,000
 
Operating income
 
$21,750
$28,500
$25,250

 

Requirements:
 
1.
Prepare an income statement performance report for August.​Note: The master budget was based on expected sales volume of 65,000 bubble kits.
2.
What accounts for most of the difference between actual operating income and master budget operating​ income?
3.
What is Great​ Bubbles' master budget variance for operating​ income? Explain why the income statement performance report provides Great Bubbles' managers with more useful information than the simple master budget variance. What insights can Great Bubbles' managers draw from this performance​ report?

 

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