Mountain Maples is a mail-order nursery dedicated to growing, selling, and shipping beautiful Japanese Maple trees. Located on a ridge-top in Mendocino County, Northern California, Mountain Maples offers two distinctive types of Japanese Maples: Butterfly and Moonfire. The trees are sold after five growing seasons. Budgeted revenue and cost data for each tree type for the most recent year follow:
.:.
Mountain Maples’ budgeted annual fixed costs are $75,000.
Actual results for the most recent year were as follows:
.:.
Required:
a. Calculate Mountain Maples’ total profit variance for the most recent year.
b. Decompose Mountain Maples’ total profit variance into a sales volume variance and
a flexible budget variance.
c. Decompose the flexible budget variance into a sales price variance, a variable cost variance, and fixed cost variance.
d. Compute the sales mix variance and the sales quantity variance, and show that they sum to the sales volume variance.
e. Using a budget reconciliation report, discuss the overall performance for Mountain Maples for the most recent year.
SOLUTION:
a.
We use the columnar format to determine the total profit variance. We have:
| Master budget | Actual results |
|---|
| Revenue – B | $160,000 | $147,000 |
| Revenue – M | 160,000 | 178,500 |
| Variable costs – B | 80,000 | 84,000 |
| Variable costs – M | 80,000 | 93,500 |
| Contribution margin | $160,000 | $148,000 |
| Fixed costs | 75,000 | 76,000 |
| Profit | $85,000 | $72,000 |
Total profit variance = $72,000 – $85,000 = ($13,000) or $13,000 U.
This large drop in profit is somewhat surprising because Mountain Maples sold the same total number of trees, 2,400, as planned. Let us dig deeper.
b.
We need Mountain Maples’ flexible budget to perform the decomposition. Notice that the flexible budget, shown below, is formulated using the actual mix of trees sold.
| Master Budget | Flexible budget | Actual results |
|---|
| Butterfly sales | 800 | 700 | 700 |
| Moonfire sales | 1,600 | 1,700 | 1,700 |
| Revenue – B | $160,000 | $140,000 | $147,000 |
| Revenue – M | 160,000 | 170,000 | 178,500 |
| Variable costs – B | 80,000 | 70,000 | 84,000 |
| Variable costs – M | 80,000 | 85,000 | 93,500 |
| Contribution margin | $160,000 | $155,000 | $148,000 |
| Fixed costs | 75,000 | 75,000 | 76,000 |
| Profit | $85,000 | $80,000 | $72,000 |
| Sales volume variance = $80,000 – $85,000 = ($5,000) or $5,000 U | | |
Flexible budget variance = $72,000 – $80,000 = ($8,000) or $8,000 U.
This analysis informs us that about 40% of the profit drop is related to changes in sales volume or mix. The remainder has to do with changes in sales prices, variable costs, and fixed costs.
c. We can perform the required analysis by comparing the line items in the flexible budget and actual results. We have:
Sales price variance = ($147,000 – $140,000) + ($178,500 – $170,000) = 15,500 F
Variable cost variance = ($84,000 – $70,000) + ($93,500 – $85,000) = ($22,500) U
Fixed cost variance = $75,000 – $76,000 = ($1,000) U
Total = ($8,000)
This analysis informs us that unexpected increases in variable costs are the primary reason for the drop in profit. Mountain Maples appears to have tried to recoup some of the cost increase via price increases. However, the gain from increasing prices has not offset the increased cost. Fixed costs have increased a little as well.
d.
As explained in Appendix C, the sales volume variance mingles two effects – changes in the total number of units sold and changes in the mix of units sold. We could decompose the two factors as below:
| Master Budget | “As if” budget with budgeted sales mix | Flexible Budget |
|---|
| Total sales in units | 2,400 | 2,400 | 2,400 |
| Weighted Unit Contribution Margin | $66.67 | $66.67 | $64.5833 |
| Contribution margin | $160,000 | $160,000 | $155,000 |
| Fixed costs | 75,000 | 75,000 | 75,000 |
| Profit before taxes | $85,000 | $85,000 | $80,000 |
In constructing this table, notice that the WUCM for the master budget is $66.67 = $160,000/2,400 trees. Similar computations apply for the other two columns.
The profit difference between the first two columns is purely due to changes in sales quantity, holding the sales mix constant. Thus, the sales quantity variance is $0 = $85,000 – $85,000. This is expected because Mountain Maples’ overall sales quantity is the same as budgeted (2,400 trees in total). The sales mix variance is the profit difference between the flexible budget and the “as if” budget. Thus, the sales mix variance = $5,000 U = $80,000 – $85,000.
e. The budget reconciliation report is as follows:
| Butterfly | Moonfire | Total |
|---|
| Master budget profit | | | $85,000 |
| Sales mix variance | | | (5,000) |
| Sales quantity variance | | | 0 |
| Sales price variance | $7,000 | 8,500) | 15,500 |
| Variable cost variance | (14,000) | (8,500) | (22,500) |
| Fixed cost variance | | | (1,000) |
| Actual profit | | | $72,000 |
This report provides a rather sobering picture to the management of Mountain Maples. It appears that variable costs are considerably higher than anticipated. They tried to recover the cost increase by raising the price of trees. Indeed, anticipating resistance, the price increase for Butterfly is less than the cost increase. Yet, the product mix deteriorated with less of the more profitable Butterfly trees being sold. This change in mix does not bode well. Management should investigate if there is a significant change in customer preferences. It also seems prudent to investigate the cause for the significant rise in unit variable costs.