Question

Exercise 10-9 a As sales manager, Joe Batista was given the following static budget report for selling expenses in the Clothing Department of Soria Company for the month of October. SORIA COMPANY Clothing Department Budget Report For the Month Ended October 31, 2020 Difference Budget Actual Favorable Unfavorable Neither Favorable nor Unfavorable Sales in units 8,100 11,000 2,900 Favorable Variable expenses Sales commissions $2,268 $2,860 $592 Unfavorable Advertising expense 1,134 990 144 Favorable Travel expense 3,888 3,850 38 Favorable Free samples given out 1,782 1,320 462 Favorable Total variable 9,072 9,020 52 Favorable Fixed expenses Rent 2,000 2,000 –0– Neither Favorable nor Unfavorable Sales salaries 1,100 1,100 –0– Neither Favorable nor Unfavorable Office salaries 700 700 –0– Neither Favorable nor Unfavorable Depreciation—autos (sales staff) 500 500 –0– Neither Favorable nor Unfavorable Total fixed 4,300 4,300 –0– Neither Favorable nor Unfavorable Total expenses $13,372 $13,320 $52 Favorable As a result of this budget report, Joe was called into the president’s office and congratulated on his fine sales performance. He was reprimanded, however, for allowing his costs to get out of control. Joe knew something was wrong with the performance report that he had been given. However, he was not sure what to do, and comes to you for advice. Prepare a budget report based on flexible budget data to help Joe.

Answer 1

A flexible budget unlike a static budget changes as volume or activity changes in the business.

A flexible budget provides a more accurate review of the financial performance of a Business than a static Budget

Management in reviewing the Actual position versus a static Budget didn't do much justice to the hardworking sales team that have almost delivered almost 4 times their sales target and even kept cost in control.

By using a flexible budget, we can tell that the respective budgets for each variable expense component ought have been:

Sales commission ought have been $8,603 ($0.78 per unit of sales) thereby showing a true savings of $5,743 and not unfavorability of $592

Advertising ought have been $4,301 ($0.39 per unit of sales) thereby showing a true savings of $3,311 and not $144

Free samples ought have been $6,759 ($0.61 per unit of sales) thereby showing a true savings of $5,439 and not $462

Travel expense ought have been $14,748 ($1.34 per unit of sales) thereby showing a true savings of $10,898 and not $38

By doing this simple analysis he would have shown management that he not only delivered on Sales Volume buy worked efficiently to cut cost per unit of sale and deliver a true savings on costs of $25,391 and not $52.

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