/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 16 Flexible budget. Brabham Enterpr... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 7: Problem 16

Flexible budget. Brabham Enterprises manufactures tires for the Formula I motor racing circuit. For August 2012 , it budgeted to manufacture and sell 3,000 tires at a variable cost of 74 dollar per tire and total fixed costs of 54,000 dollar. The budgeted selling price was 110 dollar per tire. Actual results in August 2012 were 2,800 tires manufactured and sold at a selling price of 112 per tire. The actual total variable costs were 229,600 dollar, and the actual total fixed costs were 50,000 dollar 1\. Prepare a performance report (akin to Exhibit 7-2, p. 231 ) that uses a flexible budget and a static budget. 2\. Comment on the results in requirement 1.

Short Answer

Expert verified
The actual profit was $34,000, lower than both the static ($54,000) and flexible budget profit ($46,800) due to higher variable costs.

Step by step solution

01

Determine Static Budget

The static budget is based on the original planned sales and costs. For Brabham Enterprises, the static budget is:- Sales: 3,000 tires - Selling Price: \(110 per tire - Variable Cost: \)74 per tire - Fixed Costs: $54,000The budgeted sales revenue is calculated as: \[\text{Budgeted Sales Revenue} = 3,000 \times 110 = 330,000 \text{ dollars.}\]The budgeted variable costs are:\[\text{Budgeted Variable Costs} = 3,000 \times 74 = 222,000 \text{ dollars.}\]Therefore, the static budget profit is:\[\text{Static Budget Profit} = 330,000 - 222,000 - 54,000 = 54,000 \text{ dollars.}\]
02

Determine Flexible Budget

The flexible budget is based on the actual level of sales (2,800 tires) with the original budgeted costs.- Sales: 2,800 tires - Selling Price: \(110 per tire- Variable Cost: \)74 per tire - Fixed Costs: $54,000 (fixed costs remain unchanged across sales levels)The flexible budget's sales revenue is:\[\text{Flexible Budget Sales Revenue} = 2,800 \times 110 = 308,000 \text{ dollars.}\]The flexible budget's variable costs are:\[\text{Flexible Budget Variable Costs} = 2,800 \times 74 = 207,200 \text{ dollars.}\]Thus, the flexible budget profit is:\[\text{Flexible Budget Profit} = 308,000 - 207,200 - 54,000 = 46,800 \text{ dollars.}\]
03

Determine Actual Results

The actual sales and costs are:- Sales: 2,800 tires - Selling Price: \(112 per tire- Variable Costs: \)229,600 - Fixed Costs: $50,000The actual sales revenue is:\[\text{Actual Sales Revenue} = 2,800 \times 112 = 313,600 \text{ dollars.}\]Therefore, the actual profit is:\[\text{Actual Profit} = 313,600 - 229,600 - 50,000 = 34,000 \text{ dollars.}\]
04

Compare Budgets and Actual Results

Now, compare the static budget, flexible budget, and actual results: - Static Budget Profit: $54,000 - Flexible Budget Profit: $46,800 - Actual Profit: $34,000 The actual profit is lower than both the static and flexible budget profit, with notable variances arising from increased actual variable costs and reduced fixed costs.
05

Comment on Performance

The performance shows that while the company was able to sell tires at a higher price than budgeted, their variable costs were significantly higher than expected, leading to decreased profitability. Additionally, fixed costs were lower, providing some cost savings. Overall, despite favorable pricing, the increased variable costs hurt performance.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Static Budget
A static budget is a financial plan that remains unchanged, regardless of variations in activity levels or output. It serves as a baseline for assessing a company's performance by comparing it against actual results. For Brabham Enterprises, their static budget projected the sales and costs for a production of 3,000 tires. This included:
  • Selling 3,000 tires at $110 each, resulting in a budgeted sales revenue of $330,000.
  • Variable costs of $74 per tire, totaling $222,000.
  • Total fixed costs set at $54,000.
The static budget provided an expected profit of $54,000, calculated as the difference between budgeted sales and the sum of budgeted variable and fixed costs.
While useful for initial planning, the static budget does not account for changes in production or sales volume, which is where its limitations lie.
Variable Costs
Variable costs are expenses that change in proportion to the level of production or sales. In Brabham Enterprises鈥� exercise, variable costs were initially set at $74 per tire, representing the costs that change with production volume. Such costs typically include materials, direct labor, and other expenses tied to production levels.
For instance, in the static budget scenario, the total variable costs amounted to $222,000 based on the production of 3,000 tires. However, the actual variable costs amounted to $229,600 for the 2,800 tires produced, highlighting a per-unit cost increase. This discrepancy was one of the main reasons for the lower than expected profit.
Understanding variable costs enables businesses to better predict changes in profitability with shifts in production levels and helps in making informed financial and operational decisions.
Fixed Costs
Fixed costs are expenses that do not change with the level of output produced. For Brabham Enterprises, the fixed costs in both the static and flexible budgets were $54,000. These costs remain consistent even if fewer than planned products are manufactured or sold. Examples include rent, salaries of permanent staff, and depreciation.
Interestingly, Brabham Enterprises鈥� actual fixed costs came in at $50,000, which was lower than budgeted, resulting in cost savings that partially offset their increased variable costs. Fixed costs provide a measure of financial stability, as knowing these expenses remains constant can allow for more precise financial planning. However, in scenarios of lower-than-expected sales, high fixed costs can result in a significant impact on profit margins.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Morro Bay Surfboards manufactures fiberglass surfboards. The standard cost of direct materials and direct manufacturing labor is 225 dollar per board. This includes 30 pounds of direct materials, at the budgeted price of 3 per pound, and 9 hours of direct manufacturing labor, at the budgeted rate of 15 per hour. Following are additional data for the month of July: Units completed Direct material purchases 190,000 pounds cost of direct material purchases 579,500 Actual direct manufacturing labor-hours 49,000 hours Actual direct labor cost Direct materials efficiency variance 1,500 There were no beginning inventories. 1\. Compute direct manufacturing labor variances for July. 2\. Compute the actual pounds of direct materials used in production in July. 3\. Calculate the actual price per pound of direct materials purchased. 4\. Calculate the direct materials price variance.

Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?

Why might managers find a flexible-budget analysis more informative than a static-budget analysis?

How might a manager gain insight into the causes of a flexible-budget variance for direct materials?

Tuscany Statuary manufactures bust statues of famous historical figures. All statues are the same size. Each unit requires the same amount of resources. The following information is from the static budget for 2011 : Standard quantities, standard prices, and standard unit costs follow for direct materials and direct manufacturing labor: $$\begin{array}{lccc} & \text { Standard Quantity } & \text { Standard Price } & \text { Standard Unit cost } \\ \hline \text { Direct materials } & \text { 12 pounds } & \text { \$10 per pound } & \text { \$120 } \\ \text { Direct manufacturing labor } & \text { 3.5 hours } & \text { \$50 per hour } & \text { \$175 } \end{array}$$ During 2011 , actual number of units produced and sold was 5,500 . Actual cost of direct materials used was \(\$ 668,800,\) based on 70,400 pounds purchased at 9.50 per pound. Direct manufacturing labor-hours actually used were 18,500 , at the rate of 51.50 dollar per hour. As a result, actual direct manufacturing labor costs were 952,750 dollar. Actual fixed costs were 1,180,000 dollar.There were no beginning or ending inventories. 1\. Calculate the sales-volume variance and flexible-budget variance for operating income. 2\. Compute price and efficiency variances for direct materials and direct manufacturing labor.
See all solutions

Recommended explanations on Math Textbooks

Mechanics Maths

Read Explanation

Calculus

Read Explanation

Logic and Functions

Read Explanation

Probability and Statistics

Read Explanation

Applied Mathematics

Read Explanation

Decision Maths

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.