XM Flexible Budget & Variance Analysis
This assignment provides a fle × budget for XM inn an effort to revise the Actual vs. Budget Report. The goal of this analysis is to determine the overall profitability of XM and explain it to the XM CEO. Moreover, this study also includes the calculation and analysis of materials/labour/overhead (price & quantity) variances, along with an interpretation about them to the company CEO.
1: Revise the Actual vs. Budget Report using flexible budget / provide commons on the overall profitability of XM to the CEO.
The following table presents XM Actual vs. Static Budget Report:
|
Table 1: XM Actual vs. Static Budget Report |
||||
|
Actual Budget (1) |
Fixed Budget (2) |
Static Budget Variances (3)=(1)−(2) |
||
|
Sales units |
1000 |
1050 |
−50 |
U |
|
Price |
$ 700 |
$ 700 |
$ – |
|
|
Revenue |
700,000 |
735,000 |
−35,000 |
U |
|
Cost of Production |
||||
|
Material per unit |
|
250 |
−4 |
F |
|
Total materials cost |
245,700 |
262,500 |
−16,800 |
F |
|
Labour per unit |
|
150 |
2.25 |
U |
|
Total labor cost |
152,250 |
157,500 |
−5,250 |
F |
|
Manufacturing overhead per unit |
70 |
5.6 |
U |
|
|
Total manufacturing overhead cost |
75,600 |
73,500 |
2,100 |
U |
|
Total manufacturing cost |
473,550 |
493,500 |
−19,950 |
F |
|
Gross margin |
226,450 |
241,500 |
−15,050 |
U |
|
Selling and admin. expense |
183,500 |
190,000 |
−6,500 |
F |
|
Net operating profit |
42,950 |
51,500 |
−8,550 |
U |
There are three variable costs present as part the fixed budget: material cost ($250 per unit), labour cost ($150 per unit), manufacturing overhead cost ($70 per unit), while there is only one fixed cost: selling and admin. expense ($190,000).
Based on the Actual vs. Budget Report shown in Table 1, XM is experiencing a significant shortfall in profits ($8,550).
Flexible budget is a budget designed to change as the level of activity for control purpose. It is vital that flexible budgeting is used for comparing what the cost should have been with the expenditure incurred at the actual activity level. Table 2 presents the result of the flexible budget analysis:
|
Table 2: XM Actual vs. Flexible Budget Report |
||||
|
Actual Budget (1) |
Fixed Budget (2) |
Static Budget Variances (3)=(1)−(2) |
||
|
Sales units |
1000 |
1000 |
— |
|
|
Price |
$ 700 |
$ 700 |
— |
|
|
Revenue |
700,000 |
700,000 |
— |
|
|
Cost of Production |
||||
|
Material per unit |
250 |
−4 |
F |
|
|
Total materials cost |
245,700 |
250,000 |
−4,300 |
F |
|
Labour per unit |
|
150 |
2.25 |
U |
|
Total labor cost |
152,250 |
150,000 |
2,250 |
U |
|
Manufacturing overhead per unit |
70 |
5.60 |
U |
|
|
Total manufacturing overhead cost |
75,600 |
70,000 |
5,600 |
U |
|
Total manufacturing cost |
473,550 |
470,000 |
3,550 |
U |
|
Gross margin |
226,450 |
230,000 |
−3,550 |
F |
|
Selling and admin. expense |
183,500 |
190,000 |
−6,500 |
F |
|
Net operating profit |
42,950 |
40,000 |
2,950 |
F |
This analysis indicates that using the same activity level (1,000 units), XM is operating under budget—a favorable difference, and hence is profitable.
2. Calculate variances, and to indicate whether the variance is favorable or unfavorable, provide interpretations and explanations to the CEO on the meanings of those variances.
MPV = (AQ) × (AP) − (AQ) × (SP)
MQV = (AQ) × (SP) − (SQ) × (SP)
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