Compute the sales-activity variance and the flexible-budget variance for operating income

| June 29, 2015

Suppose a chain of KFC franchises in Shanghai had budgeted sales for 2012 of RMB 7.7 million (where RMB stands for the Chinese unit of currency, officially the renminbi, also called the yuan). Cost of goods sold and other variable costs were expected to be 55% of sales.  Budgeted annual fixed costs were RMB 1.4 million. A thriving Chinese economy caused actual 2012 sales to rise to RMB 10.1 million and actual profits to increase to RMB 2,790,000. Fixed costs in 2012 were as budgeted.

The franchisee was pleased with the increase in profit.

  1. Compute the sales-activity variance and the flexible-budget variance for operating income for 2012. What can the franchisee learn from these variances?
  2. Suppose that in 2013 the Chinese economy weakened, and the franchise’s sales fell back to the RMB 7.7 million level. Given what happened in 2012, what do you expect to happen to profits in 2013?
  Actual Results at Actual Activity Level Flexible-Budget Variances Flexible Budget for Actual Sales Activity Sales-Activity Variances Static Budget
Sales
Variable Costs
Contribution Margin
Fixed Costs
Operating Income

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