[jorden_rowrow]

Folsom Fashions sells a line of women’s dresses. Folsom’s performance report for November Year 1 follows.

Actual : Dresses Sold: 5000, Sales 235,000, variable cost is 145,000 contribution margin is 90,000, fix cost is 84,000 and operating income is 6,000

Budget: Dresses Sold: 6000, Sales 300,000, variable costs: 180000, contribution margin is 120,000, fixed costs is 80000, and operating income is 40,000

The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income.

The variable cost flexible budget variance for November is:

a$4,000 unfavorable.

b.$5,000 favorable.

c.$5,000 unfavorable.

d.$4,000 favorable.

The answer is 5,000 favorable and I understand how they got the answer of 5,000 but i don’t understand why. What I am confused about is what they did was subracted variable cost of 145,000 and budgeted variable cost of 150,000 (5,000*30). Why didn’t they use the whole variable cost of 180,000? Is it because they are trying to convert that budget variable cost number of 180,000 to actual variable cost and that’s why they had to use 5000*$30.

What I thought originally is VC budget variance= Actual(145000-180000). But its not. So can someone please help in me understanding the concept?

[jorden_rowrow]

can someone plz help me

[tuanxn]

Hey Jorden, looking at the budgeted total variable cost we can see that budgeted variable cost per dress is $30 (180,000 budgeted total variable costs / 6000 budgeted dress sales)

The master budget assumes production of 6,000 units but we only produced 5,000 units so we need to figure out what the budgeted total variable cost would be if we had instead budgeted for 5,000 units. Using the budgeted variable cost per dress of $30, we would expect $150,000 in total variable costs for sales of 5000 dresses.

However, we actually only spent $145,000 in total variable costs to sell 5000 dresses so we end up with a $5,000 favorable variance in total variable costs.

The flexible budget allows us to figure out what the budgeted costs should be, given a different volume of sales or production. We can then use that budgeted figure to see if the actual costs we incurred were favorable or unfavorable.

[jorden_rowrow]

so regardless of what they ask we are always going to multiply by the actual (except for fixed cost)?

[Author]

Replies