Question

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

PHOENIX COMPANY Statement of Income from Operations For Year Ended December 31, 2017

Sales (18,000 units)		\(3,648,000
Cost of goods sold
Direct materials	\)1,185,000
Direct labor	278,000
Machinery repairs (variable cost)	63,000
Depreciation-Plant equipment	300,000
Utilities (Fixed cost is \(147,500)	200,500
Plant management salaries	210,000	2,236,500
Gross profit		1,411,500
Selling expenses
Packaging	87,500
Shipping	118,500
Sales salary (annual)	268,000	474,000
General and administrative expenses
Advertising expense	132,000
Salaries	241,000
Entertainment expense	93,500	466,500
Income from operations		\)471,000

Required

1. Prepare a flexible budget performance report for 2017.

Analysis Component

2. Analyze and interpret both the

(a) sales variance and

(b) direct materials cost variance.

Short answer

1. The Flexible budget is in step 2.

2. (a) The sales variance isfavorable.

(b) The direct material cost variance is unfavorable.

Step-by-step solution

Meaning of Variances

In managerial accounting, variance denotes the difference between standard and actual outputs. Managers perform analysis to determine the variances for making necessary decisions and future planning.

Preparation of flexible budget

Flexible Budget Performance Report

Particulars	Flexible Budget ($)	Actual Results($)	Variances($)
Sales	(3,000,000/15,000)*18,000=3,600,000	3,648,000	48,000 (F)
Cost of goods sold
Direct materials	(975,000/15,000)*18,000=1,170,000	1,185,000	15,000 (U)
Direct labor	(225,000/15,000)*18,000=270,000	278,000	8,000 (U)
Machine repairs	(60,000/15,000)*18,000=72,000	63,000	9,000 (F)
Utilities	(45,000/15,000)*18,000= 54,000	53,000	1,000 (F)
Packaging	(75,000/15,000)*18,000= 90,000	87,500	2,500 (F)
Shipping	(105,000/15,000)*18,000= 126,000	118,500	7,500 (F)
Contribution margin	$1,818,000	$1,863,000	45,000 (F)
Fixed costs
Depreciation	300,000	300,000	-
Utilities	150,000	147,500	2,500 (F)
Management salaries	200,000	210,000	10,000 (U)
Sales salaries	250,000	268,000	18,000 (U)
Advertising expense	125,000	132,000	7,000 (U)
Salaries	241,000	241,000	-
Entertainment expense	90,000	93,500	3,500 (U)
Income from operations	$462,000	$471,000	9,000 (F)

Analysis and interpretation of sales variance

$$\begin{gathered} \mathbf{\text{Salesvariance=Budgetsales-Actualsales}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\text{\$3,6000,000-\$3,648,000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\text{\$48000(Favorable)}} \end{gathered}$$

Comment:

As per the above computation, the sales variance of the company is favorable because it earns more revenues than budgeted.

Analysis and interpretation of direct materials cost variance

$$\begin{gathered} \mathbf{\text{DIrectmaterialcostvariance=Budgeteddirectmaterialcost-Actualdirectmaterialcost}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\text{\$1,170,000-\$1,185,000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\text{\$15000(Unfavorable)}} \end{gathered}$$

Comment:

According to the above-shown computations, the direct material cost variance is unfavorable because the company incurred more costs than its budget.