Question

Refer to the information in Problem 21-1B. Tohono Company’s actual income statement for 2017 follows.

TOHONO COMPANY
Statement of Income from Operations
For Year Ended December 31, 2017
Sales (24,000 units)		\(3,648,000
Cost of goods sold
Direct materials	\)1,400,000
Direct labor	360,000
Machinery repairs (variable cost)	60,000
Depreciation-Machinery	250,000
Utilities (variable cost, \(64,000)	218,000
Plant manager salaries	155,000	2,443,000
Gross profit		1,205,000
Selling expenses
Packaging	90,000
Shipping	124,000
Sales salary (annual)	162,000	376,000
General and administrative expenses
Advertising expense	104,000
Salaries	232,000
Entertainment expense	100,000	436,000
Income from operations		\)393,000

Required

1. Prepare a flexible budget performance report for 2017.

Analysis Component

1. Analyze and interpret both the (a) sales variance and (b) direct materials cost variance.

Short answer

The company’s income from operations is favorable as per flexible budget performance report.

Step-by-step solution

Meaning of Variance Analysis

Variance analysis refers to the technique used by managerial accountants for ascertaining the differences between actual and standard outputs. It enables the managers to take necessary actions to correct the adverse impact of such variations.

Preparation of flexible budget performance report

TOHONO COMPANY

Flexible Budget Performance Report

For Year Ended December 31, 2017

Particulars	Flexible Budget	Actual results	Variances
Sales	$3,600,000	$3,648,000	$48,000 F
Variable costs:
Direct materials	$1,440,000	$1,400,000	$40,000 F
Direct labor	$312,000	$360,000	$48,000 U
Machinery repairs	$68,400	$60,000	$8,400 F
Utilities	$60,000	$64,000	$4,000 U
Packaging	$96,000	$90,000	$6,000 F
Shipping	$139,200	$124,000	$15,200 F
Total variable costs	$2,115,600	$2,098,000	$17,600 F
Contribution	$1,484,400	$1,550,000	$65,600 F
Fixed costs:
Depreciation-Machinery	$250,000	$250,000	-
Utilities	$150,000	$154,000	$4,000 U
Plant manager salaries	$140,000	$155,000	$15,000 U
Sales salaries	$160,000	$162,000	$2,000 U
Advertising expenses	$81,000	$104,000	$23,000 U
Salaries	$241,000	$232,000	$9,000 F
Entertainment expenses	$90,000	$100,000	$10,000 U
Total fixed costs	$1,112,000	$1,157,000	$45,000 U
Income from operations	$372,400	$393,000	$20,600 F

Interpretation of variances

1. As per the flexible budget performance report, the sales variance is favorable because thecompany generated more revenuesthan its expectations.

2. On the other hand, the direct material cost variance is favorable because the actual material cost incurred by the company is less than its budgeted cost.