Question

Download an Excel template for this problem online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren. Pilchuck Company manufactures tote bags and has provided the following information for September 2018:

Units	Actual Results	Static Budget
Static Budget	11,000	12,000
Sales Revenue	\(368,000	\)384,000
Variable Costs	183,000	198,000
Contribution Margin	185,000	186,000
Fixed Costs	76,000	77,184
Operating Income	\(109,000	\)108,816

1. Requirements
2. Prepare a flexible budget performance report, including the heading. Use the ABS function when calculating variances, and use the drop-down selections for F or U when describing the variances.
3. Calculate the Static Budget Variance for operating income, and label it as a F (favorable) or U (unfavorable) variance.

Short answer

1. Only variable costsare depicted as favorable.
2. Static Budget Variance for operating income = $184

Step-by-step solution

Meaning of Budget

Budgeting is the practice of planning for the future. This procedure aids managers in planning for the future and maintaining control over the organization's operations.

(1) Preparing a flexible budget

Pilchuck Company Flexible budget performance report The month ended September 2018
		Column (1)	Column 2 Col. 1- Col. 3		Column 3	Column 4 Col. 3-Col. 5		Column 5
	Budgeted Amounts Per unit	Actual results	Flexible Budget Variance	F or U	Flexible Budget	Sales volume Variance	F or U	Static Budget
Units		11,000			11,000			12,000
Sales Revenue	$32.00	$368,000	$16,000	F	$ 352,000	$32,000	U	$384,000
Variable Costs	$16.50	183,000	1,500	U	181,500	16,500	F	198,000
Contribution Margin		185,000	14,500	F	170,500	15,500	U	186,000
Fixed Cost		76,000	1,184	F	77,184	0		77,184
Operating Income		$109,000	$ 15,684	F	$ 93,316	15,500	U	$1,08,816

(2) Calculating Static Budget Variance

Static Budget Variance for operating income
Amount	$184 (Column 1-Column 5)
F or U	F