Answer:
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. Â 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. Â It is not static. Â This means that the budgeted units change to the level of the actual units. Â 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. Â For example, Sales Commission could be budgeted at $400 under 10,000 volume. Â 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. Â Then the flexed budgeted cost is compared to the actual cost to obtain the variance or difference. Â Actual performance can then be compared based on like terms and not based on unlike terms.
This is the advantage of flexible budgets. Â They allow a manager's performance to be evaluated based on variable volumes of activity instead of static volumes.
