Which of the following choices is correct about master budget variance reporting?

Ayle Manufacturing produces parts for farm equipment. The managerial accountant oversees several large departments. The tractor part is produced in the assembly department. The variable selling expenses and manufacturing costs for the tractor part are listed below:

Ayle Manufacturing Variable Selling Expenses and Manufacturing Costs Specialty Component Production Report
Direct materials	$800
Direct labor	$100
Variable manufacturing overhead	$125
Fixed manufacturing overhead (current production level)	$200
Variable selling expenses (only incurred on sales to outside consumers)	$125

Another division at Ayle Manufacturing could produce the same tractor part internally instead of purchasing the part from an outside supplier. The managerial accountant noted that the other division has excess capacity and could produce the part in that department. There is competition in the marketplace and the current price to product the part at an outside firm is $2,500.

What is the highest transfer price the managerial accountant should pay to purchase the part from a competitor? What is the lowest acceptable transfer price if the part was produced by the internal operations division at Ayle Manufacturing?

ANSWER

INCORRECT

·         

$25; $12.50

·         

THE CORRECT ANSWER

$2,500; $1,025

·         

YOU WERE SURE AND INCORRECT

$250; $125

·         

$25,000; $10,250

·         

I DON'T KNOW YET

The highest transfer price is $2,500; the lowest transfer price is $1,025. The other answers are not correct.

$800 + $100 + $125 = $1,025

Frames, Inc. manufactures, produces, and sells picture frames. The frame sells for $25 and the variable operating costs per unit are $12. The managerial accountant reported fixed costs of $50,000 per month, which produces a sales volume of 25,000 frames. The manager needs to sell 26,000 frames to meet the sales quota and incur no more than $70,000 of fixed costs.

The flexible budget, with a sales volume of 30,000 frames, would show operating income of:

ANSWER

INCORRECT

·         

$32,000

·         

$23,000

·         

YOU WERE SURE AND INCORRECT

$230,000

·         

THE CORRECT ANSWER

$320,000

·         

I DON'T KNOW YET

The operating income for a sales volume of 30,000 frames on the flexible budget is $320,000. The other answers are not correct.

Sales Revenue (units × selling price) = 30,000 × $25 = $750,000

Variable Costs (units × variable cost per unit) = 30,000 × $12 = $360,000

Fixed Expenses =  $70,000

Total Expenses = $360,000 + $70,000 = $430,000

Total Operating Income= $750,000 - $430,000 = $320,000 shown on the flexible budget

Which of the following choices is correct about master budget variance reporting?

ANSWER

INCORRECT

·         

A favorable flexible budget variance ($2,000 F) and an unfavorable volume variance ($2,500 U) could be netted to an unfavorable master budget variance of $4,500 U.

·         

THE CORRECT ANSWER

A favorable flexible budget variance ($7,000 F) and an unfavorable volume variance ($11,500 U) could be netted to an unfavorable master budget variance of $4,500 U.

·         

YOU WERE SURE AND INCORRECT

A favorable flexible budget variance ($3,000 F) and an unfavorable volume variance ($3,600 U) could be netted to an unfavorable master budget variance of $6,600 U.

·         

A favorable flexible budget variance ($6,000 F) and an unfavorable volume variance ($11,500 U) could be netted to an unfavorable master budget variance of $17,500 U.

·         

I DON'T KNOW YET

A favorable flexible budget variance ($7,000 F) and an unfavorable volume variance ($11,500 U) could be netted to an unfavorable master budget variance of $4,500 U is a correct statement about master budget variance reporting. The other answers are NOT correct.