Scenario: Four Flags is a retail department store. The following cost-volume relationships were used in developing a flexible budget for the company for the current year:
Yearly Fixed Expenses Variable Expenses per Sales Dollar
Cost of merchandise sold 0 $0.600
Selling and promotion of expenses $210,000 0.082
Building occupancy expenses 186,000 0.022
Buying expenses 150,000 0.040
Delivery expenses 111,000 0.010
Credit and collection expenses 72,000 0.002
Administrative expenses 531,000 0.003
Totals $1,260,000 $0.759
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 expenses 1,020,000
Building occupancy expenses 420,000
Buying expenses 594,000
Delivery expenses 183,000
Credit and collection expenses 90,000
Administrative expenses 564,000
A) Prepare a schedule comparing the actual results with the 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 flexible budget.
The expert creates a budget for a company.