SOLUTION: 11-42

1. The flexible budget for LakeMaster Company for the month of June, based on 4,800 units,
showing separate variable cost budgets is as follows:

LAKEMASTER COMPANY
FLEXIBLE BUDGET
FOR THE MONTH OF JUNE

Revenue [4,800  ($1,800,000/5,000)] ................................. $1,728,000

Deduct: Variable costs:

Direct material (4,800  $90) ......................................... $ 432,000
Direct labor (4,800  $66) .............................................. 316,800
Variable overhead (4,800  $54).................................... 259,200
Variable selling (4,800  $18) ........................................ 86,400
Total variable costs.................................................. 1,094,400

Contribution margin ............................................................ $ 633,600

Deduct: Fixed costs:

Fixed overhead ............................................................... $ 270,000
Fixed general and administrative ................................. 180,000 450,000
Operating income ................................................................ $ 183,600
2. For the month of June, the company's flexible-budget variances are as follows:

LAKEMASTER COMPANY
FLEXIBLE-BUDGET VARIANCES
FOR THE MONTH OF JUNE
Flexible-
Flexible Budget
Actual Budget Variance
Units .................................................................... 4,800 4,800 0
Revenue .............................................................. $1,728,000 $1,728,000 $ 0
Variable costs:
Direct material .............................................. $ 480,000 $ 432,000 $48,000 U
Direct labor ................................................... 288,000 316,800 28,800 F
Variable overhead ........................................ 264,000 259,200 4,800 U
Variable selling ............................................. 138,000 86,400 51,600 U
Deduct: Total variable costs ............................. $1,170,000 $1,094,400 $75,600 U
Contribution margin........................................... $ 558,000 $ 633,600 $75,600 U

Fixed costs:
Fixed overhead ............................................. $ 270,000 $ 270,000 $ 0
Fixed general and administrative ............... 172,500 180,000 7,500 F
Deduct: Total fixed costs .................................. $ 442,500 $ 450,000 $ 7,500 F
Operating income............................................... $ 115,500 $ 183,600 $68,100 U

3. The revised budget and variance data are likely to have the following impact on Al
Richmond's behavior:

 Richmond is likely to be encouraged by the revised data, since the major portion of
the variable-cost variance (direct material and variable selling expense) is the
responsibility of others.

 The detailed report of variable costs shows that the direct-labor variance is favorable.
Richmond should be motivated by this report because it indicates that the cost-
cutting measures that he implemented in the manufacturing area have been effective.

 The report shows unfavorable variances for direct material and variable selling
expense. Richmond may be encouraged to work with those responsible for these
areas to control costs.