Snells is a retail department store. The following cost-volume relationships were used in developing a flexible budget for the company for the current year:. Management expected to attain a sales level of $12 million during the current year. At the end of the year, the actual results achieved by the company were as follows:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $10,500,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 6,180,000
Selling and promotion expense . . . . . . . . . . . . . . 1,020,000
Building occupancy expense . . . . . . . . . . . . . . . . 420,000
Buying expense . . . . . . . . . . . . . . . . . . . . . . . . . . 594,000
Delivery expense . . . . . . . . . . . . . . . . . . . . . . . . . 183,000
Credit and collection expense . . . . . . . . . . . . . . . 90,000
Administrative expense . . . . . . . . . . . . . . . . . . . . 564,000
Instructions:
a. Prepare a schedule comparing the actual results with flexible budget amounts developed for the actual sales volume of $10,500,000. Organize your schedule as a partial multiple-step income statement, ending with operating income. Include separate columns for
(1) Flexible budget amounts,
(2) Actual amounts, and
(3) Any amount over (under) budget. Use the cost-volume relationships given in the problem to compute the flexible budget amounts.
b. Write a statement evaluating the company’s performance in relation to the plan reflected in the flexiblebudget.

Explanation:

                                                      Actual                 Flexible      Variance

Net sales                                   $10,500,000   $12,000,000  $1,500,000 U

Cost of goods sold . . . . . . . . . . .    6,180,000      7,062,857        882,857 F

Gross profit                               $4,320,000   $4,937,143        $617,143 U

Selling and promotion expense 1,020,000        1,165,714          145,714 F

Building occupancy expense . . . .420,000        420,000           0

Buying expense . . . . . . . . . . . . . . . 594,000        678,857           84,857 F

Delivery expense . . . . . . . . . . . . . . 183,000         209,143           26,143 F

Credit and collection expense . . . 90,000         102,857           12,857 F

Administrative expense . . . . . . . .564,000       564,000           0

Net Income                              $1,449,000   $1,796,572     $347,572 U

3b. The company did not achieve its sales revenue target with an unfavorable difference of $1,500,000.  This resulted to a gross profit decline of $617,143 and a net income decline of $347,572.  However, it achieved some gains in the cost of goods sold and other expenses, occasioned by the less than expected sales performance.

Explanation:

1. A flexible budget is a budget that changes with respect to the sales volume or level of activity.  It is unlike a static budget which remains the same, no matter the level of activity.

2. Flexible Budget Calculations:

a) Net Sales    $10,500,000

b) Cost of goods sold = $6,180,000/10,500,000 x 12,000,000 = $7,062857

c) Selling & promotion expense = $1,020,000/10,500,000 x 12,000,000 = $1,165,714

d) Building occupancy expense = 420,000  will remain fixed

e) Buying expense = 594,000

/6,180,000 x 7,062,857 = $678,857

f) Delivery expense = 183,000

/10,500,000 x 12,000,000 = $209,143

g) Credit and collection expense = 90,000

/10,500,000 x 12,000,000 = $102,857

h) Administrative expense = 564,000 will remain fixed.

d. all of the above are true.