Financial & Managerial Accounting
Financial & Managerial Accounting
18th Edition
ISBN: 9781260006520
Author: williams
Publisher: MCG
bartleby

Concept explainers

bartleby

Videos

Question
Book Icon
Chapter 23, Problem 7BP

a.

To determine

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

a.

Expert Solution
Check Mark

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 E
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 = (ED)
 Net sales18,000,00018,000,000-
 Less: Cost of goods sold11,700,000 (1)11,160,000(540,000)
 Gross profit on sales (A)6,300,0006,840,000540,000
Less: Operating expenses:
Selling and promotion1,780,000 (2)800,000(980,000)
Building occupancy480,000 (3)450,000(30,000)
Buying1,000,000 (4)720,000(280,000)
Delivery290,000 (5)200,000(90,000)
Credit and collection240,000 (6)100,000(140,000)
Administrative660,000 (7)360,000(300,000)
 Total operating expenses (B)4,450,0002,630,000(1,820,000)
 Operating income C = (AB)1,850,0004,210,0002,360,000

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]=$18,000,000×$0.650 per sales dollar=$11,700,000 (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)=($18,000,000×$0.09 per sales dollar)+$160,000=1,620,000+$160,000=$1,780,000 (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)=($18,000,000×$0.02 per sales dollar)+$120,000=$360,000+$120,000=$480,000 (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)=($18,000,000×$0.05 per sales dollar)+$100,000=$900,000+$100,000=$1,000,000 (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)=($18,000,000×$0.01 per sales dollar)+$110,000=$180,000+$110,000=$290,000 (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)=($18,000,000×$0.01 per sales dollar)+$60,000=$180,000+$60,000=$240,000 (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)=($18,000,000×$0.02 per sales dollar)+$300,000=$360,000+$300,000=$660,000 (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 $2,360,000 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.

c.

To determine

Explain the reason why flexible budget is more useful in evaluating the performance of the Departmental Store F.

c.

Expert Solution
Check Mark

Explanation of Solution

Explain the reason why flexible budget is more useful in evaluating the performance of the Departmental Store F as follows:

Flexible budget allows the manager to evaluate the results (output) at the different level of activity. It helps the manager to take correct decision regarding the controllable and non-controllable expenditures.

d.

To determine

Explain whether the fixed costs and variable costs would always change in a flexible budget or not.

d.

Expert Solution
Check Mark

Explanation of Solution

Explain whether the fixed costs and variable costs would always change in a flexible budget or not as follows:

No, the fixed cost and variable costs would not always change in a flexible budget, because fixed cost remains the same in the all level of production. But, the variable cost would change based on the number of units produced at the various level of production.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 23 Solutions

Financial & Managerial Accounting

Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
Responsibility Accounting| Responsibility Centers and Segments| US CMA Part 1| US CMA course; Master Budget and Responsibility Accounting-Intro to Managerial Accounting- Su. 2013-Prof. Gershberg; Author: Mera Skill; Rutgers Accounting Web;https://www.youtube.com/watch?v=SYQ4u1BP24g;License: Standard YouTube License, CC-BY