Question

Cell One Technologies manufactures capacitors for cellular base stations and other communications applications. The company’s July 2018 flexible budget shows output levels of 6,000, 7,500, and 9,500 units. The static budget was based on expected sales of 7,500 units.

CELL ONE TECHNOLOGIES Flexible Budget For the Month Ended July 31, 2018

Budget Amount per Unit

Units 6,000 7,500 9,500

Sales Revenue \(21 \)126,000 \(157,500 \)199,500

Variable Expenses 10 60,000 75,000 95,000

Contribution Margin 66,000 82,500 104,500

Fixed Expenses 55,000 55,000 55,000

Operating Income \(11,000 \)27,500 \(49,500

The company sold 9,500 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 \)206,500

Variable Expenses 100,100

Variable Expenses 106,400

Fixed Expenses 56,000

Operating Income $504,00

Requirements

1. Prepare a flexible budget performance report for July.

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

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

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

Short answer

1. Sales revenue, contribution margin, and operating income depict a favourable balance.
2. A $7,500 static budget for 7,500 units results in a $27,500 operating profit.
3. Static budget variance for static operating income = $22,900
4. The performance of a static allocation masks an untrue cost variance.

Step-by-step solution

Meaning of variable expense

The cost that moves in the same direction as the production level is known as a variable cost. The total of such cost depends on the production level, but per unit variable cost remains the same.

Preparing a flexible budget

Cell One Technologies
Flexible Budget Performance Report
For the month ended July 31, 2018
	Budgeted amount per unit	Actual result for 9,500 units	Flexible budget for 9,500 units	Flexible Budget variance
		A	B	A-B
Sales revenue	$21	$206,500	$199,500	$7,000	F
Variable expense	$10	$100,100	$95,000	$5,100	U
Contribution margin		$106,400	$104,500	$1,900	F
Fixed expense		$56,000	$55,000	$1,000	U
Operating Income		$50,400	$49,500	$9,000	F

Explaining the static budget performance report

The fixed budget performance report assesses the differences between actual and budgeted expenses. The basic units sold in the current situation are more than the budgeted unit, and the real operating income for the $9,500 units is $50,400 which is approximate double of the operating profit at 7,500 units of $27,500 operating profit.

Computing static budget variance

$\begin{array}{c}\text{Static\hspace{0.33em}budget\hspace{0.33em}variance\hspace{0.33em}for\hspace{0.33em}Operating\hspace{0.33em}Income}=\text{Actual}-\text{Static\hspace{0.33em}budget}\\ =\$50,400-\$27,000\\ =\$22,900\end{array}$

Explaining why the flexible budget performance report provides more helpful information

In this situation, the management cannot entirely rely on the static budget variance to give them rational information. A fixed budget is created for an anticipated level, although actual operational expenses will typically deviate from it. As a result, the performance of a static allocation masks an untrue cost variance. Based on the basic output level, a flexible budget performance will compare the actual performance with the budgeted standards. As a result, a flexible budget variation is a difference between the budgeted cost and the actual cost determined by the company's basic output level.