Flexible-budget preparation and analysis

Bank Management Printers, Inc., produces luxury checkbooks with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer's bank. The company's operating budget for September 2014 included these data:

The actual results for September 2014 were as follows:

The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. As the company's management accountant, you have been asked to provide explanations for the disappointing September results.
Bank Management develops its flexible budget on the basis of budgeted per-output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs.

Required:
1. Prepare a static-budget-based variance analysis of the September performance.
2. Prepare a flexible-budget-based variance analysis of the September performance.
3. Why might Bank Management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis? Explain your answer.

1. Variance Analysis for Bank Management Printers for September 2014

Level 1 Analysis
Actual
Results
(1) Static-Budget
Variances
(2) = (1) – (3) Static
Budget
(3)
Units sold
Revenue 12,000
$252,000a 3,000 U
$ 48,000 U 15,000
$300,000c
Variable costs 84,000d 36,000 F 120,000f
Contribution margin
Fixed costs
Operating income 168,000
150,000
$ 18,000
12,000 U
5,000 U
$ 17,000 U 180,000
145,000
$ 35,000
$17,000 U
Total static-budget variance
2. Level 2 Analysis

Actual
Results
(1)
Flexible-
Budget
Variances
(2) = (1) – (3)

Flexible
Budget
(3)
Sales
Volume
Variances
(4) = (3) – (5)

Static
Budget
(5)
Units sold 12,000 0 12,000 3,000 U 15,000
Revenue $252,000a $12,000 F $240,000b $60,000 U $300,000c
Variable costs 84,000d 12,000 F 96,000e 24,000 F 120,000f
Contribution margin 168,000 24,000 F 144,000 36,000 U 180,000
Fixed costs 150,000 5,000 U 145,000 0 145,000
Operating income $ 18,000 $19,000 F $ (1,000) $36,000 U $ 35,000

$19,000 F $36,000 U
Total flexible-budget Total sales-volume
variance variance
$17,000 U
Total static-budget variance
a 12,000 × $21 = $252,000 d 12,000 × $7 = $ 84,000
b 12,000 × $20 = $240,000 e 12,000 × $8 = $ 96,000
c 15,000 × $20 = $300,000 f 15,000 × $8 = $120,000

3. Level 2 analysis breaks down the static-budget variance into a flexible-budget variance and a sales-volume variance. The primary reason for the static-budget variance being unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual 12,000. One explanation for this reduction is the increase in selling price from a budgeted $20 to an actual $21. Operating management was able to reduce variable costs by $12,000 relative to the flexible budget. This reduction could be a sign of efficient management. Alternatively, it could be due to using lower quality materials (which in turn adversely affected unit volume).