Question

Cadiz Co. uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are: Sales commissions 5% Advertising 4% Traveling 7% Delivery 1% Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000. The actual selling expenses incurred in February, 2019, by Cadiz are as follows: Sales commissions $17,200 Advertising 12,000 Traveling 23,700 Delivery 2,400 Fixed selling expenses consist of sales salaries $41,500 and depreciation on delivery equipment $10,000. Prepare a flexible budget performance report, assuming that February sales were $330,000.

Answer 1

Cadiz Co.

Flexible Budget Performance Report:

Budget

Flexible Actual Variance

Sales $330,000 $330,000 $0

Variable costs:

Sales commissions 16,500 17,200 700 U

Advertising 13,200 12,000 1,200 F

Traveling 23,100 23,700 600 U

Delivery 3,300 2,400 900 F

Fixed selling expenses:

Sales Salaries 40,000 41,500 1,500 U

Depreciation: delivery 10,000 10,000 0 None

Total 700 U

Step-by-step explanation:

a) Data:

Budget

Static Actual Variance

Sales $360,000 $330,000 $30,000 U

Variable costs:

Sales commissions 18,500 17,200 1,300 F

Advertising 14,400 12,000 2,400 F

Traveling 25,200 23,700 1,500 F

Delivery 3,600 2,400 1,200 F

Fixed selling expenses:

Sales Salaries 40,000 41,500 1,500 U

Depreciation: delivery 10,000 10,000 0 None

b) Flexible Variable Expenses:

Sales commission = 5% of $330,000 = $16,500

Advertising = 4% of $330,000 = $13,200

Traveling = 7% of $330,000 = $23,100

Delivery = 1% of $330,000 = $3,300

c) Cadiz Co.'s flexible budget changes with respect to the volume of sales. Since some percentages of the sales are given for Sales commission, advertising, traveling, and delivery, these change as the volume of sales changes. This flexible budget forms the basis for the management of Cadiz Co. to judge the actual performance with the budget, which enables control to be instituted.