Preparing a flexible budget and performance report

This continues the Piedmont Computer Company situation from Chapter 22. Assume Piedmont Computer Company has created a standard cost card for the PCC model tablet computer, with overhead allocated based on direct labor hours:

Direct materials	\( 300 per tablet
Direct labor	3 hours per tablet at \)26 per hour
Variable overhead	3 hours per tablet at \(5 per hour
Fixed overhead	\)54,000 per month

During the month of September, Piedmont Computer Company incurred the following costs while manufacturing 1,100 PCC model tablets:

Direct material	\(341,000
Direct labor	88,000
Variable overhead	17,600
Fixed overhead	56,320

Requirements

1. Prepare a flexible budget for September for 900, 1,000, and 1,100 PCC model tablets. The tablet has a standard sales price of \)675. List variable costs separately.

2. Using 1,000 PCC model tablets for the static budget, prepare a flexible budget performance report for September. Total sales revenue for the month was $767,800. The company sold 1,100 tablets.

3. What insights can the management of Piedmont Computer Company draw from the 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

Units	Budgeted per unit cost	900	1000	1100
Particular	Amount $	Amount $	Amount $
Sales revenue	$675	$607,500	$675,000	$742,500
Less: Direct material	$300	270,000	300,000	330,000
Less: Direct labor	$78	70,200	78,000	85,800
Less: variable overhead	$15	13,500	15,000	16,500
Less: Fixed overhead		54,000	54,000	54,000
Total cost of goods sold		407,700	447,000	486,300
Gross profit		$199,800	$228,000	$256,200

03

Flexible budget performance report

Particular	Actual results	Flexible budget variance	Flexible budget	Sales volume variance	Static budget
Units	1,100		1,100		1,000
Sales revenue	$767,800	$25,300	$742,500	$67,500	$675,000
Direct material	341,000	11,000	330,000	30,000	300,000
Direct labor	88,000	2,200	85,800	7,800	78,000
Variable overhead	17,600	1,100	16,500	1,500	15,000
Contribution margin	$322,200	11,000	$310,200	28,200	$282,000
Fixed expenses	56,320	2,320	54,000	0	54,000
Operating income	$264,880	$8,680	$256,200	$28,200	$228,000

04

Information is drawn from the performance report

Particular	Amount $
Flexible budget variance (F)	$8,680
Sales volume variance (F)	28,200
Static budget variance(F)	$36,880

The performance report reflects that the flexible budget variance, sales volume, and static budget variance are favorable. It means that the business entity can control the cost and sales revenue.

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