Financial & Managerial Accounting
Financial & Managerial Accounting
18th Edition
ISBN: 9781259692406
Author: Jan Williams, Susan Haka, Mark S Bettner, Joseph V Carcello
Publisher: McGraw-Hill Education
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Chapter 23, Problem 7AP

a.

To determine

Prepare a flexible budget of the company and a schedule comparing the actual results with flexible budget amounts.

a.

Expert Solution
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Explanation of Solution

Budget:

Budget is an effective tool to achieve the financial and operational goals of the business. Budget is the key element of the financial planning and it assists managers to control the business costs. Management should set the budgeted amount at reasonable and achievable levels.

Prepare a flexible budget of the company and a schedule comparing the actual results with flexible budget amounts as follows:

Company S
Comparison of Budgeted and Actual Revenue and Expenses
For the Year Ended December 31
ParticularsFlexible Budget ($)
 (D)
Actual budget ($)
(E)
Over (or under) budget ($)
F = (DE)
 Net sales10,500,00010,500,000-
 Less: Cost of goods sold6,300,000 (1)6,180,000(120,000)
 Gross profit on sales (A)4,200,0004,320,000120,000
Less: Operating expenses:
Selling and promotion1,071,000 (2)1,020,000(51,000)
Building occupancy417,000 (3)420,0003,000
Buying580,500 (4)594,00013,500
Delivery195,000 (5)183,000(12,000)
Credit and collection93,000 (6)90,000(3,000)
Administrative562,500 (7)564,0001,500
 Total operating expenses (B)2,919,0002,871,000(48,000)
 Operating income C = (AB)1,281,0001,449,000168,000

Table (1)

Working note:

Calculate the cost of goods sold of the flexible budget

Cost of goods sold = [The amount of sales ×Variable cost of goods sold per sales dollar]=$10,500,000×$0.600 per sales dollar=$6,300,000 (1)

Calculate selling and promotion expense of the flexible budget

Selling and promotion expense}  = [The amount of sales ×(Variable selling and promotion expense per sales dollar)]+(Fixed portion of the expense)=($10,500,000×$0.082 per sales dollar)+$210,000=$861,000+$210,000=$1,071,000 (2)

Calculate building occupancy expense of the flexible budget

Buidling occupancy expense}  = [The amount of sales ×(Variable building occupancy expense per sales dollar)]+(Fixed portion of the expense)=($10,500,000×$0.022 per sales dollar)+$186,000=$231,000+$186,000=$417,000 (3)

Calculate buying expense of the flexible budget

Buying expense}  = [The amount of sales ×Variable buying expense per sales dollar]+(Fixed portion of the expense)=($10,500,000×$0.041 per sales dollar)+$150,000=$430,500+$150,000=$580,500 (4)

Calculate delivery expense of the flexible budget

Delivery expense}  = [The amount of sales ×Variable delivery expense per sales dollar]+(Fixed portion of the expense)=($10,500,000×$0.008 per sales dollar)+$111,000=$84,000+$111,000=$195,000 (5)

Calculate credit card collection expense of the flexible budget

Credit card collection expense}  = [The amount of sales ×(Variable credit card collection expense per sales dollar)]+(Fixed portion of the expense)=($10,500,000×$0.002 per sales dollar)+$72,000=$21,000+$72,000=$93,000 (6)

Calculate administrative expense of the flexible budget

Administrative expense}  = [The amount of sales ×(Variable administrative expense per sales dollar)]+(Fixed portion of the expense)=($10,500,000×$0.003 per sales dollar)+$531,000=$31,500+$531,000=$562,500 (7)

b.

To determine

Evaluate the company performance in relation to plan reflected in the flexible budget.

b.

Expert Solution
Check Mark

Explanation of Solution

Evaluate the company performance in relation to plan reflected in the flexible budget as follows:

Net income in the actual budget is better than the flexible budget, because net income in the actual budget is increased by $168,000 than flexible budget. This result may be attributed by the following factors:

  • Company performance in the purchase of merchandise is better in the actual budget.
  • The company has incurred very lower expenditure in the actual performance (selling and promotion expense, building occupancy, buying expense, delivery expense, credit collection expense, and administrative expense) than the budgeted.

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Chapter 23 Solutions

Financial & Managerial Accounting

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