Preparing a flexible budget performance report

Cell Plus Technologies manufactures capacitors for cellular base stations and other communication applications. The company’s July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000 units. The static budget was based on expected sales of 10,000 units.

Cell One Technologies
Flexible budget
For month ended July 31, 2018
	Budgeted amount per unit
Units		8,500	10,000	12,000
Sales revenue	\(24	\)204,000	\(240,000	\)288,000
Variable expenses	13	110,500	130,000	156,000
Contribution margin		93,500	110,000	132,000
Fixed expenses		57,000	57,000	57,000
Operating income		\(36,500	\)53,000	\(75,000

The company sold 12,000 units during July, and its actual operating income was as follows:

Cell One Technologies
Income statement
For the Month Ended July 31, 2018
Sales revenue	\)295,000
Variable expenses	161,100
Contribution margin	133,900
Fixed expenses	58,000
Operating income	$75,900

Requirements

1. Prepare a flexible budget performance report for July 2018.

2. What was the effect on Cell Plus’s operating income of selling 2,000 units more than the static budget level of sales?

3. What is Cell Plus’s static budget variance for operating income?

4. Explain why the flexible budget performance report provides more useful information to Cell Plus’s managers than the simple static budget variance. What insights can Cell Plus’s managers draw from this performance report?

Step by step solution

01

Definition of Flexible Budget

The budget that gets adjusted according to the level of activity the company achieves is known as a flexible budget. This budget gets adjusted according to the business’s cost variation.

02

Flexible budget performance report

Particular	Actual results	Flexible budget variance	Flexible budget	Sales volume variance	Static budget
Units	12,000		12,000		10,000
Sales revenue	$295,000	$7,000(F)	$288,000	$48,000(F)	$240,000
Variable expenses	161,100	5,100(U)	156,000	26,000(U)	130,000
Contribution margin	133,900	1,900(F)	132,000	22,000(F)	110,000
Fixed expenses	58,000	1,000(U)	57,000	0	57,000
Operating income	$75,900	$900(F)	$75,000	$22,000(F)	$53,000

03

Effect of excess sales on operating income

When the business entity sells 2,000 units more than the level of sales of the static budget, it will increase the operating income of the business entity by $22,000.

04

Static budget variance for operating income

Particular	Amount $
Flexible budget variance operating income	$900
Sales volume variance operating income	22,000
Static budget variance for operating income	$22,900

05

Importance of information provided by flexible budget

A flexible budget performance report provides more useful information than a static budget because it is prepared for only one activity level and does not change. At the same time, flexible budget variance separates variance into two components:

1. Flexible budget variance.
2. Sales volume variance.

The performance reports reflect that the business entity’s operating income is $900 more than the flexible budget. If the actual sales are compared with the static budget, the business entity can generate a $22,000 higher operating income when it sells 2,000 units.

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