XM Flexible Budget and Variance Analysis

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XM Flexible Budget & Variance Analysis

This assignment provides a fle × budget for XM inn an effort to revise the Actual vs. Budget Report. The goal of this analysis is to determine the overall profitability of XM and explain it to the XM CEO. Moreover, this study also includes the calculation and analysis of materials/labour/overhead (price & quantity) variances, along with an interpretation about them to the company CEO.

1: Revise the Actual vs. Budget Report using flexible budget / provide commons on the overall profitability of XM to the CEO.

The following table presents XM Actual vs. Static Budget Report:

Table 1: XM Actual vs. Static Budget Report
	Actual Budget (1)	Fixed Budget (2)	Static Budget Variances (3)=(1)−(2)
Sales units	1000	1050	−50	U
Price	$ 700	$ 700	$ –
Revenue	700,000	735,000	−35,000	U
Cost of Production
Material per unit		250	−4	F
Total materials cost	245,700	262,500	−16,800	F
Labour per unit		150	2.25	U
Total labor cost	152,250	157,500	−5,250	F
Manufacturing overhead per unit		70	5.6	U
Total manufacturing overhead cost	75,600	73,500	2,100	U
Total manufacturing cost	473,550	493,500	−19,950	F
Gross margin	226,450	241,500	−15,050	U
Selling and admin. expense	183,500	190,000	−6,500	F
Net operating profit	42,950	51,500	−8,550	U

There are three variable costs present as part the fixed budget: material cost ($250 per unit), labour cost ($150 per unit), manufacturing overhead cost ($70 per unit), while there is only one fixed cost: selling and admin. expense ($190,000).

Based on the Actual vs. Budget Report shown in Table 1, XM is experiencing a significant shortfall in profits ($8,550).

Flexible budget is a budget designed to change as the level of activity for control purpose. It is vital that flexible budgeting is used for comparing what the cost should have been with the expenditure incurred at the actual activity level. Table 2 presents the result of the flexible budget analysis:

Table 2: XM Actual vs. Flexible Budget Report
	Actual Budget (1)	Fixed Budget (2)	Static Budget Variances (3)=(1)−(2)
Sales units	1000	1000	—
Price	$ 700	$ 700	—
Revenue	700,000	700,000	—
Cost of Production
Material per unit		250	−4	F
Total materials cost	245,700	250,000	−4,300	F
Labour per unit		150	2.25	U
Total labor cost	152,250	150,000	2,250	U
Manufacturing overhead per unit		70	5.60	U
Total manufacturing overhead cost	75,600	70,000	5,600	U
Total manufacturing cost	473,550	470,000	3,550	U
Gross margin	226,450	230,000	−3,550	F
Selling and admin. expense	183,500	190,000	−6,500	F
Net operating profit	42,950	40,000	2,950	F

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This analysis indicates that using the same activity level (1,000 units), XM is operating under budget—a favorable difference, and hence is profitable.

2. Calculate variances, and to indicate whether the variance is favorable or unfavorable, provide interpretations and explanations to the CEO on the meanings of those variances.

Materials price variance
Materials quantity variance
Labour price variance
Labour quantity variance
Overhead price variance
Overhead quantity variance

MPV = (AQ) × (AP) − (AQ) × (SP)

MQV = (AQ) × (SP) − (SQ) × (SP)

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