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Karo-lina-s [1.5K]
2 years ago
14

Exercise 8-5A Determining flexible budget variances LO 8-4 Benson Manufacturing Company established the following standard price

and cost data: Sales price $ 8.10 per unit Variable manufacturing cost $ 3.90 per unit Fixed manufacturing cost $ 2,100 total Fixed selling and administrative cost $ 500 total Benson planned to produce and sell 2,400 units. Actual production and sales amounted to 2,700 units. Assume that the actual sales price is $7.80 per unit and that the actual variable cost is $4.25 per unit. The actual fixed manufacturing cost is $1,300, and the actual selling and administrative costs are $530. Required a.&b. Determine the flexible budget variances and classify the effect of each variance by selecting favorable (F) or unfavorable (U).
Business
1 answer:
leva [86]2 years ago
8 0

Answer:

A. $720 Unfavorable

B. $840 Unfavorable

C. $1,560 Unfavorable

D. $800 Favorable

E. $30 Unfavorable

F. $790 Unfavorable

Explanation:

The computation of given question is shown below:-

A. Sales = (Budget quantity - Actual quantity) × Budgeted sale price

= ($8.10 - $7.80) × 2,400

= $0.3 × 2,400

= $720 Unfavorable

B. Variable manufacturing = (Actual variable cost - Budgeted variable manufacturing cost) × Budgeted sale price

= ($4.25 - $3.90) × 2,400

= $0.35 × 2,400

= $840 Unfavorable

C. Contribution margin = ((Budgeted sales price - Budgeted variable manufacturing cost) - (Actual sale price - Actual variable cost)) × Budgeted sale price

= (($8.10 - $3.90) - ($7.80 - $4.25)) × 2,400

= $0.65 × 2,400

= $1,560 Unfavorable

D. Fixed manufacturing = Actual fixed manufacturing cost - Budgeted  Fixed manufacturing cost

= $1,300 - $2,100

= $800 Favorable

E. Fixed selling and admin cost = Actual selling and administrative costs - Budgeted fixed selling and administrative cost

= $530 - $500

= $30 Unfavorable

F. Net income (loss) = Contribution margin - Fixed manufacturing + Fixed selling and admin cost

= $1,560 - $800 + $30

= $790 Unfavorable

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A parent sold land costing $400,000 to its subsidiary for $450,000 in 2017. The subsidiary still holds the land at the end of 20
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The Signal Company has operating income (EBIT) before depreciation expense of $1,500,000. The company’s depreciation expense is
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Answer:

A. Net income is $825,000; and Net cash flow is $1,225,000.

B. Net income is $750,000; and Net cash flow is $1,150,000.

C. Parts A net cash flow will equal part B net cash flow by deducting $75,000 difference, or Parts B net cash flow will equal part A net cash flow by addiing $75,000 difference.

Explanation:

The following are given:

Operating income (EBIT) before depreciation expense = $1,500,000

Depreciation expense = $400,000

Tax rate = 25%

We therefore proceed as follows:

A. If the company is 100% equity financed (zero debt), calculate its net income and net cash flow.

<u>Calculation of net income</u>

Income after depreciation but before tax = Operating income (EBIT) before depreciation expense - Depreciation expense = $1,500,000 - $400,000 = $1,100,000

Tax expense = Income after depreciation but before tax * Tax rate = $1,100,000 * 25% = $275,000

Net income = Income after depreciation but before tax - Tax expenses = $1,100,000 - $275,000 = $825,000

<u>Calculation of net cash flow</u>

Net cash flow = Net income + Depreciation expense = $825,000 - $400,000 = $1,225,000

B. If the company (instead) has $100,000 in annual interest expense, recalculate the net income and net cash flow.

<u>Calculation of net income</u>

Income after depreciation and interest expenses but before tax = Operating income (EBIT) before depreciation expense - Depreciation expense - Interest expense = $1,500,000 - $400,000 - $100,000 = $1,000,000

Tax expense = Income after depreciation and interest expense but before tax * Tax rate = $1,000,000 * 25% = $250,000

Net income = Income after depreciation and interest expense but before tax - Tax expenses = $1,000,000 - $250,000 = $750,000

<u>Calculation of net cash flow</u>

Net cash flow = Net income + Depreciation expenses = $750,000 + $400,000 = $1,150,000

C. Explain the difference in your answers to parts A & B – specifically, reconcile the change in net cash flow that occurred.

Difference in net income = Part A net income - Part B net income = $825,000 - $750,000 = $75,000

Difference in net cash flow = Part A net cash flow - Part B net cash flow = $1,225,000 - $1,150,000 = $75,000

Each of Part A net income and net cash flow is $75,000 greater than part B because part A is an 100% equity financed with the need to pay annual interest expense on debt of $100,000 like in Part B before calculating the Tax expense and the net income.

The $75,000 diffence is as a result of additional tax that Part A has to paid on $100,000. That is,

Additional tax expense in part A = Interest expense not paid in Part A * Tax rate = $100,000 * 25% = $25,000

Diffrenrence = Intererest expense not paid in part A - Additional tax expense = $100,000 - $25,000 = $75,000

For example, if there is no annual interest of $100,000 to be paid in part B, we can then reconcile by just addinf back the difference as follows:

Part B new net cash flow = Part B initial cash flow + Difference in net cash flow = $1,150,000 + $75,000 =  $1,225,000 = Part A net cash flow

Also, if annual interest expense has to be paid in part A as a result of being now financed by debt, we will just deduct the difference as follows:

Part A new net cash flow = Part A initial cash flow - Difference in net cash flow = $1,225,000 -  $75,000 =  $1,150,000 = Part B initial net cash flow.

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