1. Problem 11-43:
Flexible budgeting; variance; impact on behavior
LawnMate Company manufactures power mowers that are sold throughout the United States
and Canada. The company uses a comprehensive budgeting process and compares actual
results to budgeted amounts on a monthly basis. Each month, LawnMate’s accounting
department prepares a variance analysis and distributes the report to all responsible parties. Al
Richmond, production manager, is upset about the results for May. Richmond, who is
responsible for the cost of goods manufactured, has implemented several cost cutting
measures in the manufacturing area and is discouraged by the unfavorable variance in variable
costs.
LAWNMATE COMPANY
Operating Record
For the month of May
Master Budget
Units sold …………………………………………………………..
5,000
Revenue ……………………………………………………………..
1,200,000
Variable cost ……………………………………………………….
760,000
Contribution margin ………………………………
440,000
Factory overhead ………………………………………………...
180,000
Factory general and administration cost ………………
120,000
Operating income …………………………………….
140,000
Actual
4,800
1,152,000
780,000
372,000
180,000
115,000
77,000
Variance
200 U
48,000 U
20,000 U
68,000 U
-----------5,000 F
63,000 U
When the master budget was prepared, LawnMate’s cost accountant, Joan Ballard, supplied
the following unit costs: direct material, Rs.60; direct labor, Rs.44; variable overhead, Rs.36;
and variable selling, Rs.12.
The total variable costs of Rs.780,000 for May include Rs.320,000 for direct material,
Rs.192,000 for direct labor, Rs.176,000 for variable overhead, and Rs.92,000 for variable selling
expenses. Ballard believes that LawnMate’s monthly reports would be more meaningful to
everyone if the company adopted flexible budgeting and prepared more detailed analyses.
Required:
A. Prepare a flexible budget for LawnMate Company for the month of May that includes
separate variable-cost budgets for each type of cost (direct material, etc.).
B. Determine the variance between the flexible budget and actual cost for each cost item.

2. Solution:
Actual
4,800
Revenue units sold
Variable costs
Direct material
Direct labor
Variable overhead
Variable selling
Total Variable cost
Contribution margin
Fixed cots
Fixed overhead
Fixed general and administrative cost
Total Fixed cost
Net income
Flexible
4,800
Variance
------------
1,152,000
------------
320.000
192,000
176,000
92,000
780,000
372,000
288,000
211,200
172,800
57,600
729,600
422,400
32,000 UF
19,200 F
3,200 UF
34,400 UF
50,400 UF
50,400 UF
180,000
115,000
295,000
77,000
180,000
120,000
300,000
122,400
------------5,000 F
5000 F
45,400 UF
1,152,000