# XM Flexible Budget and Variance Analysis

XM Flexible Budget & Variance Analysis

This assignment provides a fle × budget for XM inn an effort to revise the Actual vs. Budget Report. The goal of this analysis is to determine the overall profitability of XM and explain it to the XM CEO. Moreover, this study also includes the calculation and analysis of materials/labour/overhead (price & quantity) variances, along with an interpretation about them to the company CEO.

1: Revise the Actual vs. Budget Report using flexible budget / provide commons on the overall profitability of XM to the CEO.

The following table presents XM Actual vs. Static Budget Report:

 Table 1: XM Actual vs. Static Budget Report Actual Budget     (1) Fixed Budget    (2) Static Budget Variances    (3)=(1)−(2) Sales units 1000 1050 −50 U Price \$            700 \$            700 \$                  – Revenue 700,000 735,000 −35,000 U Cost of Production Material per unit 250 −4 F Total materials cost 245,700 262,500 −16,800 F Labour per unit 150 2.25 U Total labor cost 152,250 157,500 −5,250 F Manufacturing overhead per unit 70 5.6 U Total manufacturing overhead cost 75,600 73,500 2,100 U Total manufacturing cost 473,550 493,500 −19,950 F Gross margin 226,450 241,500 −15,050 U Selling and admin. expense 183,500 190,000 −6,500 F Net operating profit 42,950 51,500 −8,550 U

There are three variable costs present as part the fixed budget: material cost (\$250 per unit), labour cost (\$150 per unit), manufacturing overhead cost (\$70 per unit), while there is only one fixed cost: selling and admin. expense (\$190,000).

Based on the Actual vs. Budget Report shown in Table 1, XM is experiencing a significant shortfall in profits (\$8,550).

Flexible budget is a budget designed to change as the level of activity for control purpose. It is vital that flexible budgeting is used for comparing what the cost should have been with the expenditure incurred at the actual activity level.  Table 2 presents the result of the flexible budget analysis:

 Table 2: XM Actual vs. Flexible Budget Report Actual Budget     (1) Fixed Budget      (2) Static Budget Variances (3)=(1)−(2) Sales units 1000 1000 — Price \$            700 \$           700 — Revenue 700,000 700,000 — Cost of Production Material per unit 250 −4 F Total materials cost 245,700 250,000 −4,300 F Labour per unit 150 2.25 U Total labor cost 152,250 150,000 2,250 U Manufacturing overhead per unit 70 5.60 U Total manufacturing overhead cost 75,600 70,000 5,600 U Total manufacturing cost 473,550 470,000 3,550 U Gross margin 226,450 230,000 −3,550 F Selling and admin. expense 183,500 190,000 −6,500 F Net operating profit 42,950 40,000 2,950 F
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This analysis indicates that using the same activity level (1,000 units), XM is operating under budget—a favorable difference, and hence is profitable.

2. Calculate variances, and to indicate whether the variance is favorable or unfavorable, provide interpretations and explanations to the CEO on the meanings of those variances.

• Materials price variance
• Materials quantity variance
• Labour price variance
• Labour quantity variance