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
7,900

11,000

3,100
Favorable
Variable expenses

Sales commissions
$2,054

$2,860

$806
Unfavorable
Advertising expense
869

770

99
Favorable
Travel expense
3,476

4,950

1,474
Unfavorable
Free samples given out
1,659

1,210

449
Favorable
Total variable
8,058

9,790

1,732
Unfavorable
Fixed expenses

Rent
1,900

1,900

–0–
Neither Favorable nor Unfavorable
Sales salaries
1,100

1,100

–0–
Neither Favorable nor Unfavorable
Office salaries
800

800

–0–
Neither Favorable nor Unfavorable
Depreciation—autos (sales staff)
600

600

–0–
Neither Favorable nor Unfavorable
Total fixed
4,400

4,400

–0–
Neither Favorable nor Unfavorable
Total expenses
$12,458

$14,190

$1,732
Unfavorable

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. (List variable costs before fixed costs.)

SORIA COMPANY

Clothing Department's Flexible Budgeted Report:

The report is attached herein.

The variable costs were flexed using 11,000 units sales volume instead of the budgeted 7,900 units as follows.

Workings:

1. Sales Commission = $2,054/7,900 x 11,000 = $2,860

2. Advertising = $869/7,900 x 11,000 = $770

3. Travel Expense = $3,476/7,900 x 11,000 = $4,840

4. Free Samples = $1,659/7,900 x 11,000 = $2,310

The idea is to compute the flexed amounts using unit budgeted cost (e.g. Travel Expense $3,476/7,900) to multiply the flexed volume (11,000).

The fixed costs were not similarly flexed.  They are assumed to have completely displayed their nature as fixed irrespective of the level of activity or the sales volume.

Explanation:

A flexible budget is one that changes in volume according to the level of activity.  It is not static.  This means that the budgeted units change to the level of the actual units.  This flexing affects all variable costs based on the now flexed volume while the fixed costs remain since they do not vary according to the level of activity.  For example, Sales Commission could be budgeted at $400 under 10,000 volume.  If the actual sales volume is 12,000, the Sales Commission has to be flexed to $480 ($400/10,000 x 12,000) to reflect the actual volume performance.  Then the flexed budgeted cost is compared to the actual cost to obtain the variance or difference.  Actual performance can then be compared based on like terms and not based on unlike terms.

This is the advantage of flexible budgets.  They allow a manager's performance to be evaluated based on variable volumes of activity instead of static volumes.

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