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Acct: profit planning and Budgeting (6)


Option #2: Calculating Flexible Budget Variances

Stellar Packaging Products is experiencing an increase in demand for the month of August as a result of Estrella Coffee’s comeback in its retail outlets. The following fact pattern forms the basis for the static budget:

Stellar Packaging Products

Variable Costs Total

Fixed Costs Total

 Raw materials

 $         100,000


 Direct manufacturing labor

 $         125,000


 Indirect manufacturing labor


 $           105,000

 Factory Insurance & Utilities


 $            63,000

 Depreciation – Pressroom


 $            38,500

 Repairs and maintenance – factory


 $            28,000

 Selling, marketing & distribution expenses

 $            40,000

 $            80,000

 General and administrative expenses


 $           120,000

 Variable Cost and Volume Data


 Raw materials = 0.10 lbs x $2.00/lb.

 $                    0.20

 Direct Labor = 0.025 hr x $10/hr.

 $                    0.25

 Volume in units


Sales per unit are $3.00.


  1. In good form, prepare the static budget operating income in contribution format.
  2. Suppose actual sales demand increases to 700,000 units for August; assume the units are within the relevant range. Prepare the flexible budget for August in contribution format.
  3. Compute and reconcile the sales volume variance for August. Indicate whether the variance is favorable or unfavorable.
  4. In a one page composition, provide an explanation for the change in the sales volume variance for August, and identify the elements which give rise to the difference between the flexible and static budgets. Also explain the reason for completing a flexible budget for the period.

Your paper should meet the following requirements:

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