2020 were 2,700 tires manufactured and sold at a selling price of $117 per tire. The actual total variable costs were $210,600, and the actual total fixed costs were $49,000. Read the requirements. Requirement 1. Prepare a performance report with a flexible budget and a static budget. Requirements 1. Prepare a performance report with a flexible budget and a static budget. 2. Comment on the results in requirement 1.
Requirement 1: Prepare a performance report with a flexible budget and a static budget.
To prepare the performance report, we need to compare the actual results with both a flexible budget and a static budget.
Flexible Budget:
To create a flexible budget, we need to calculate the budgeted variable cost per unit and apply it to the actual output (2,700 tires). The fixed costs remain the same.
1. Budgeted Variable Cost per Tire:
Total Variable Costs / Total Output
Budgeted Variable Cost per Tire = $210,600 / 2,700 = $78
2. Flexible Budget:
Flexible Budget = (Budgeted Variable Cost per Tire * Actual Output) + Total Fixed Costs
Flexible Budget = ($78 * 2,700) + $49,000
Flexible Budget = $210,600 + $49,000
Flexible Budget = $259,600
Static Budget:
The static budget remains fixed and does not adjust for changes in output.
Static Budget = Budgeted Variable Costs + Total Fixed Costs
Static Budget = $210,600 + $49,000
Static Budget = $259,600
Requirement 2: Comment on the results in requirement 1.
Comparing the results of the flexible budget and static budget:
Actual Sales Revenue = Actual Output * Selling Price per Tire
Actual Sales Revenue = 2,700 * $117
Actual Sales Revenue = $315,900
1. Flexible Budget:
- Flexible Budgeted Sales Revenue = (Budgeted Selling Price per Tire * Actual Output) = ($117 * 2,700) = $315,900
- Flexible Budgeted Variable Costs = (Budgeted Variable Cost per Tire * Actual Output) = ($78 * 2,700) = $210,600
- Flexible Budgeted Fixed Costs = Total Fixed Costs = $49,000
- Flexible Budgeted Profit = Flexible Budgeted Sales Revenue - (Flexible Budgeted Variable Costs + Flexible Budgeted Fixed Costs) = $315,900 - ($210,600 + $49,000) = $56,300
2. Static Budget:
- Static Budgeted Sales Revenue = Budgeted Sales Price per Tire * Actual Output = $117 * 2,700 = $315,900
- Static Budgeted Variable Costs = Budgeted Variable Costs = $210,600
- Static Budgeted Fixed Costs = Total Fixed Costs = $49,000
- Static Budgeted Profit = Static Budgeted Sales Revenue - (Static Budgeted Variable Costs + Static Budgeted Fixed Costs) = $315,900 - ($210,600 + $49,000) = $56,300
The results from both the flexible budget and static budget show a profit of $56,300. The actual sales revenue, total variable costs, and total fixed costs all match the information provided.
It can be concluded that the company's performance is in line with the budgeted expectations, as the actual results align closely with the intended goals outlined in both the flexible and static budgets.
Requirement 1: Prepare a performance report with a flexible budget and a static budget.
To prepare a performance report, we need to compare the actual results to both a flexible budget and a static budget. Here are the steps to complete this task:
Step 1: Calculate the flexible budget.
The flexible budget allows us to adjust the budgeted amounts based on the actual sales volume. To calculate the flexible budget, we need to determine the budgeted revenue and expenses per unit and multiply them by the actual sales volume.
Budgeted Revenue per Unit = Selling Price per Tire
Budgeted Revenue = Budgeted Revenue per Unit × Actual Sales Volume
Budgeted Variable Costs per Unit = Actual Total Variable Costs / Actual Sales Volume
Budgeted Variable Costs = Budgeted Variable Costs per Unit × Actual Sales Volume
Budgeted Fixed Costs = Actual Total Fixed Costs
Flexible Budget = Budgeted Revenue - Budgeted Variable Costs - Budgeted Fixed Costs
Step 2: Calculate the static budget.
The static budget is a predetermined budget based on a fixed sales volume. It does not consider any changes in the actual sales volume.
Static Budget = Budgeted Revenue - Budgeted Variable Costs - Budgeted Fixed Costs
Requirement 2: Comment on the results in requirement 1.
To comment on the results, we need to compare the actual results with the flexible budget and the static budget.
If the actual revenue is higher than the flexible budget, it indicates that sales volume was better than expected or that selling price was higher than anticipated. Conversely, if the actual revenue is lower than the flexible budget, it suggests that sales volume was lower or selling price was lower.
If the actual variable costs are higher than the flexible budget, it indicates that variable costs per unit were higher than expected or that the actual sales volume was higher. Conversely, if the actual variable costs are lower than the flexible budget, it suggests that variable costs per unit were lower or that the actual sales volume was lower.
If the actual fixed costs are higher than the flexible budget, it suggests that fixed costs were higher than expected. Conversely, if the actual fixed costs are lower than the flexible budget, it indicates that fixed costs were lower.
By comparing the results to the static budget, we can assess the overall performance regardless of changes in the sales volume. If the actual revenue, variable costs, and fixed costs are all in line with the static budget, it suggests that the performance is as anticipated. Any deviations might indicate better or worse performance compared to the static budget.
It is important to analyze the results and identify the reasons behind any discrepancies between the actual results, flexible budget, and static budget. This analysis can help management make informed decisions and take appropriate actions.