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XM Flexible Budget and Variance Analysis

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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