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