Reference no: EM13879124

Problem: Prepare a flexible operating budget

The computation of operating income for Frisco Company for 2013 follows:

Sales		1,800,000
Cost of goods manufactured and sold:
Direct materials	360,000
Direct labor	240,000
Variable manufacturing overhead	120,000
Fixed manufacturing overhead	240,000	960,000
Gross margin		840,000
Selling expenses:
Variable	$132,000
Fixed	168,000	300,000
		540,000
Administrative expenses:
Variable	$156,000
Fixed	192,000	348,000
Net operating income		192,000

An operating budget is prepared for 2014 with sales forecasted at a 25% increase in volume. Direct materials, direct labor, and all costs labeled as variable are completely variable. Fixed costs are expected to continue except for a $24,000 increase in fixed administrative costs. Actual operating data for 2014 are:

Sales	$2,160,000
Direct materials	444,000
Direct labor	288,000
Variable manufacturing overhead	148,800
Fixed manufacturing overhead	246,000
Variable selling expenses	186,000
Fixed selling expenses	157,200
Variable administrative expenses	198,000
Fixed administrative expenses	218,200

a. Prepare a budget report comparing the 2014 planned operating budget with actual 2014 data.

b. Prepare a budget report that would be useful in appraising the performance of the various persons charged with responsibility to provide satisfactory income. (Hint: Prepare budget data on a flexible basis and use the percentage by which sales were actually experienced.)

c. Comment on the differences revealed by the two reports.