Stellar Packaging Products is experiencing an increase in demand for the month of August as a result of Estrella Coffee’s comeback in its retail outlets. The following fact pattern forms the basis for the static budget:
| Stellar Packaging Products | Variable Costs Total | Fixed Costs Total |
| Raw materials | $ 100,000 | |
| Direct manufacturing labor | $ 125,000 | |
| Indirect manufacturing labor | $ 105,000 | |
| Factory Insurance & Utilities | $ 63,000 | |
| Depreciation – Pressroom | $ 38,500 | |
| Repairs and maintenance – factory | $ 28,000 | |
| Selling, marketing & distribution expenses | $ 40,000 | $ 80,000 |
| General and administrative expenses | $ 120,000 |
| Variable Cost and Volume Data | Plastic |
| Raw materials = 0.10 lbs x $2.00/lb. | $ 0.20 |
| Direct Labor = 0.025 hr x $10/hr. | $ 0.25 |
| Volume in units | 500,000 |
Sales per unit are $3.00.
Required:
- In good form, prepare the static budget operating income in contribution format.
- Suppose actual sales demand increases to 700,000 units for August; assume the units are within the relevant range. Prepare the flexible budget for August in contribution format.
- Compute and reconcile the sales volume variance for August. Indicate whether the variance is favorable or unfavorable.
- In a one page composition, provide an explanation for the change in the sales volume variance for August, and identify the elements which give rise to the difference between the flexible and static budgets. Also explain the reason for completing a flexible budget for the period.
Answer
Stellar Packaging Products
Statement showing static budget operating income in contribution format:
| Particular | Amount in $ |
| Volume 500,000 | |
| Sale price | $3 |
| Total Sale 500,000*3 |
1500000 |
| Less: Variable Costs: | |
| Raw Material 0.20 *500,000 |
100,000 |
| Direct 0.25*500,000 |
125,000 |
| Selling, Marketing & Distribution expenses $ 0.08 * 5000,000 |
40,000 |
| Contribution Margin $ 2.47 | 1,235,000 |
| Less: Fixed Costs | |
| Indirect manufacturing labor | 105,000 |
| Factory Insurance & Utilities | 63,000 |
| Depreciation – Pressroom | 38,500 |
| Repairs and maintenance – factory | 28,000 |
| elling, Marketing & Distribution expenses | 80,000 |
| General and administrative expenses | 120,000 |
| Operating Income | 800,500 |
Part 2
Part 2 Statement showing flexible budget operating income in contribution format:
| Particular | Amount in $ |
| Volume 700,000 | |
| Sale price | $3 |
| Total Sale 700,000*3 |
2100000 |
| Less: Variable Costs: | |
| Raw Material 0.20 *700,000 |
140,000 |
| Direct 0.25*700,000 |
175,000 |
| Selling, Marketing & Distribution expenses $ 0.08 * 7000,000 |
56,000 |
| Contribution Margin $ 2.47 | 1,729,000 |
| Less: Fixed Costs | |
| Indirect manufacturing labor | 105,000 |
| Factory Insurance & Utilities | 63,000 |
| Depreciation – Pressroom | 38,500 |
| Repairs and maintenance – factory | 28,000 |
| elling, Marketing & Distribution expenses | 80,000 |
| General and administrative expenses | 120,000 |
| Operating Income | 1,294,500 |
Part 3
Sales Volume Variance
= (Actual units sold – Budgeted units sold) x Budgeted price per unit
=(700,000 -500,000) * $ 3
=200,000 * 3
=$ 600,000 Favorable
Par 4
Change in the sales Volume Variance is due to Increase in the Quantity of Goods sold
Identify the elements which give rise to the difference between the flexible and static budgets.
Answer:
The main elements which give rise to the difference between the flexible and static budgets is that, A static budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.
