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John Richardson is the manufacturing production supervisor for Vernon Tool Works, a company that manufactures hand tools for mechanics. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife, This is the dumbest place I've ever worked. Last year the company set up this budget assuming it would sell 253,400 units. Well, it sold only 243,400. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 253,400 units goal and it sells 263,400. The companys making all kinds of money. Youd think Id get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if Id stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I've ever worked.

Vernons master budget and the actual results for the most recent year of operating activity follow.

Vernon's master budget and the actual results for the most recent year of operating activity follow. For U Master Budget 253,400 $ 3,801,000 Actual Results 263,400 $ 4.056,360 Variances 10,000 $ 255,360 F Number of units Sales revenue Variable manufacturing costs Materials Labor Overhead Variable selling, general and administrative costs Contribution margin Fixed costs Manufacturing overhead Selling, general and administrative costs Net income (608,160) (316,750) (342,090) (481,460) 2,052,540 (630,160) (325,250) (359,290) (507,460) 2,234,200 22,000 8,500 17,200 26,000 181,660 F (1,292,340) (476,392) 283,808 (1,290,340) (467,092) 476,768 2,000 9,300 $ 192,960 F U $ $ F Required c. Prepare a flexible budget and recompute the budget variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) Flexible Budget Actual Results Variances Number of Units 263,400 4,056,360 Sales revenue $ Variable manufacturing costs Materials (630,160) Labor Overhead (325,250) (359,290) (507,460) 2,234,200 Variable Selling, general & administrative Contribution margin Fixed costs Manufacturing overhead Selling, general & administrative (1,290,340) (467,092) 476,768 Net income $

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