Given the production target of 650 bears for February, assume that the actual output for February was 630 bears and that actual production costs totaled $54,280. Which is true?"

Question

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month’s sales.
Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month’s stuffing and fabric needs respectively are planned for raw materials ending inventory each month.

A. BB did well, saving $620 compared with the master budget
B. BB did well, saving $620 compared with the flexible budget
C. BB missed the master budget target by $300
D. BB missed the flexible budget target by $300
E. Unable to assess performance

Answer 1

D. BB missed the flexible budget target by $300

While the actual expenditure of $54,280 is $620 less than the master budget of $54,900, it is not appropriate to compare directly actual expenditure with master budget expenditure, because the levels of activity are different (650 in master and 630 for actual). Thus actual is properly compared only with the flexible budget, which essentially is the master budget UPDATED for actual levels of output.