I need help with this Decision cases Compute flexible budget and sales volume va
ID: 2477130 • Letter: I
Question
I need help with this Decision cases
Compute flexible budget and sales volume variances.
ReelTime distributes DVDs to movie retailers, including dot-coms. ReelTime's top management meets monthly to evaluate the company's perfomance.
Controller Terri Lon prepared the following perfomance report for the meeting.
Lon also revealed that the actual sales price of $20 per movie was equal to the budgeted sales price and that there were no changes in inventories for the month.
Management is disapointed by the operating income results. CEO' Lyle Nesbitt exclaims, ''how can actual operating income be roughly 13% of the static budget amount when there are so many favorable variances ?''
ReelTime, INC
Income Statement Perfomance Report
Month Ended July 31
Operating income $ 16,475 $127,050 $110,575 U
Requirements
1. Prepare a more informative performance report. Be sure to include a flexible budget for the actual number of DVDs bough and sold.
2.As a member of ReelTime's management team, which variances would you want invstigated? why?
3. Nesbitt believes that many consumers are postponing purchases of new movies until after the introduction of a new format for recordable DVD players.
In light of this information, how would you rate the company's performance?
Actual Results Static Budget Variance Sales Revenue $1,640,000 $1,960,000 $320,000 U Variable expense: Cost of good sold 773,750 980,000 206,250 F Sales commissions 77,375 107,800 30,425 F Shipping expenses 42,850 53,900 11,050 F Fixed expenses : Salary expense 311,450 300,500 10,950 U Depreciation expense 208,750 214,000 5,250 F Rent expense 128,250 108,250 20,000 U Advertising expense 81,100 68,500 12,600 U Total expenses 1,623,525 1,832.950 209,425 FExplanation / Answer
1. As the actual S.P. of $20/Movie was equal to the budgeted S.P. Actual sales Volume=1640000/20= 82000 Movies We can draw up the Flexible budget, ie.Deriving figures based on static budget, for 82000 movie volume Static Budget1960000/20=98000 Movies Flexible Budget for 82000 Movies Actual Results for 82000 Movies Variance based on Flexible Budget Sales Revenue $1,960,000 1640000 $1,640,000 $0 Variable expense: Cost of good sold 980,000 820000 773,750 $46,250 F Sales commissions 107,800 90200 77,375 $12,825 F Shipping expenses 53,900 45100 42,850 $2,250 F Fixed expenses : Salary expense 300,500 300,500 311,450 ($10,950) UF Depreciation expense 214,000 214,000 208,750 $5,250 F Rent expense 108,250 108,250 128,250 ($20,000) UF Advertising expense 68,500 68,500 81,100 ($12,600) UF Total expenses 1,832,950.00 1,646,550 1,623,525 $23,025 F Operating income $ 16,475 $127,050 $110,575 U -6,550.00 16,475.00 ($23,025) F 2.Analysing as above, there is a loss(6550) as per re-drawn flexible budget for the achieved Actual sales volume of 82000 Movies.Comparing with this budget -all Variable expenses show favourable variances. Fixed expenses like Rent, Advertising and salary expense ,in that order, show unfavourable variances These should be investigated for the increase. 3.As, Nesbitt believes that many consumers are postponing purchases of new movies until after the introduction of a new format for recordable DVD players, there is less volume of movies sold. Hence fixed expenses are absorbed by lesser no.of units. Situation will improve when volume of sales increases. In the light of the above, the co. has performed better than the budget.