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The master budget at Monroe Manufacturing last period called for sales of 42,100 units at $43 each. The costs were estimated to be $27 variable per unit and $525,000 fixed. During the period, actual production and actual sales were 45,100 units. The selling price was $42 per unit. Variable costs were $29 per unit. Actual fixed costs were $516,000.Required:Prepare a profit variance analysis.Note: Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.

Question

The master budget at Monroe Manufacturing last period called for sales of 42,100 units at 43each.Thecostswereestimatedtobe43 each. The costs were estimated to be 27 variable per unit and 525,000fixed.Duringtheperiod,actualproductionandactualsaleswere45,100units.Thesellingpricewas525,000 fixed. During the period, actual production and actual sales were 45,100 units. The selling price was 42 per unit. Variable costs were 29perunit.Actualfixedcostswere29 per unit. Actual fixed costs were 516,000.Required:Prepare a profit variance analysis.Note: Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.

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Solution

To prepare a profit variance analysis, we need to calculate the following:

  1. Sales Volume Variance: This is the difference between the budgeted and actual units sold, multiplied by the budgeted selling price.

    Calculation: (Actual units sold - Budgeted units sold) * Budgeted selling price = (45,100 units - 42,100 units) * 43/unit=3,000units∗43/unit = 3,000 units * 43/unit = $129,000 F (Favorable, because actual units sold were more than budgeted)

  2. Sales Price Variance: This is the difference between the budgeted and actual selling price, multiplied by the actual units sold.

    Calculation: (Actual selling price - Budgeted selling price) * Actual units sold = (42/unit−42/unit - 43/unit) * 45,100 units = -1/unit∗45,100units=−1/unit * 45,100 units = -45,100 U (Unfavorable, because actual selling price was less than budgeted)

  3. Variable Cost Variance: This is the difference between the budgeted and actual variable cost per unit, multiplied by the actual units produced.

    Calculation: (Actual variable cost/unit - Budgeted variable cost/unit) * Actual units produced = (29/unit−29/unit - 27/unit) * 45,100 units = 2/unit∗45,100units=2/unit * 45,100 units = 90,200 U (Unfavorable, because actual variable cost was more than budgeted)

  4. Fixed Cost Variance: This is the difference between the budgeted and actual fixed costs.

    Calculation: Actual fixed costs - Budgeted fixed costs = 516,000−516,000 - 525,000 = -$9,000 F (Favorable, because actual fixed costs were less than budgeted)

So, the profit variance analysis would look like this:

  • Sales Volume Variance: $129,000 F
  • Sales Price Variance: -$45,100 U
  • Variable Cost Variance: $90,200 U
  • Fixed Cost Variance: -$9,000 F

The overall variance is the sum of these, which is -15,300U(Unfavorable).Thismeansthattheactualprofitwas15,300 U (Unfavorable). This means that the actual profit was 15,300 less than the budgeted profit.

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