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    Creating a Budget for a Company

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    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.

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    Solution Summary

    The expert creates a budget for a company.