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The Wildwood Creations Ltd budgeted income statement discloses important information about the business performance. Specifically, it shows its divergence from the estimated target and the performance of each department. It discloses the most rewarding departments of the business as well as those that have the least returns.
Identification of the Problem
Although the business had reported an increase in the net revenue, the company had a decrease in its total profits.
Investigation Into the Problem
An investigation into the problem showed that the accountant had made an error when calculating revenue. The actual revenues were higher than reported at $1,060,840.00. In addition, the difference between the budgeted revenue and actual revenue was $113,040.00, while the difference between the budgeted profits and the actual profits was $32,308.90 (Working 11). The difference in growth of revenues with that of the profits is because of the changes in variable costs.
Analysis
The business had an actual net revenue of $1,060,840.00 against a budgeted net revenue of $947,800 (Working 1 and 2). This figure represented an increase of 12% from the set target. The owners’ salaries did not change; their basic package was $180,000. However, the bonus package differed from the actual salary since it was pegged at 5% of the business total revenue. Therefore, due to a difference in the actual revenue from the budgeted, the owners had an actual bonus of $53,042.00 instead of the $47,390 budgeted bonus. The salaries paid to permanent workers did not differ in the period. It is worth noting that the employment package each of these three employees is fixed at $43,000 per annum. Notably, this pay does not vary with an employee’s productivity.
There was a steady increase in the wages paid for minor repairs. This expense rose by 47% from the budgeted level of $102,480 to $151,032 (Working 3 and 4). Similarly, there was an increase in wages on “rush jobs” by $405, which is a 10% increase (Working 3 and 4). The cost of materials used in new tables decreased by $2800, which is 4%. This decline was due to a fall in demand by 20 units (Working 5 and 6). The cost of transport was 1% less than the set target. This decline was due to a fall in repairs by a similar percentage (Working 7 and 8). The advertising cost increased by $2000, which is 13% due to the issuance of flyers. In addition, the miscellaneous expenditures reduced by $900, which is 11%.
Conclusion
To sum up, although Wildwood is facing steep competition from rival businesses, its operations are still profitable. Therefore, it should continue to search for new and better markets.

  1. Underperforming departments should be closed and more focus should be put on the profitable areas. For instance, minor service had an actual income of $151,032.00 against a budget of $585,600.00 (Working 12 and 13). On the contrary, the manufacture of new tables surpassed the business targets. It had an actual gross return of $367,200.00 against a set target of $353,600.00 (Working 5 and 6).
  2. Increases in sales only affect the variable costs and not the fixed costs. In the preparation of the flexible budget, there is only an increase in the variable costs (Working 9). Specifically, these calculations show that changes in business performance do not affect the fixed costs.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Appendix
Working 1

Working 2

Actual Revenue
 Revenue from major repairs and restoration  $      361,200.00
 Revenue from minor and rush repairs  $      332,440.00
 Revenue from new tables  $      367,200.00
 $   1,060,840.00

 
Working 3: Actual
Working 4

Budgeted Cost of Minor Repair, rush jobs, replacement parts
 Expenses  No. of Jobs  Cost per Hour  cost per part  Hours per Job  Total
 Minor repair (Labor)  $           1,830.00  $                               28.00  $                           2.00  $  102,480.00
 Rush Jobs (LABOR)  $                 50.00  $                               27.00  $                           3.00  $      4,050.00
 Replacement parts  $           1,880.00  $                               47.00  $    88,360.00
 Total  $  194,890.00

 
Working 5

New Tables
Actual Cost
 Incomes  No. of units  Price per unit  Cost of material per table  Total
 New tables  $               540.00  $              680.00  $  367,200.00
 Expenses
 Materials used  $               540.00  $  140.00  $    75,600.00
 Gross Income  $  291,600.00

 
Working 6

New Tables Budgeted Cost
 Incomes  No. of units  Price per unit  Cost of material per table  Total
 New tables  $              520.00  $                             680.00  $  353,600.00
 Expenses
 Materials used  $              520.00  $                             140.00  $    72,800.00
 Gross Profit  $  280,800.00

 
Working 7

Transportation
Actual Cost
 Number of repairs             3,330.00
 Transported for repair (0.35)             1,165.50
 Transport cost  ($38)  $        44,289.00

 
Working 8

Transportation
Budgeted Cost
 Number of repairs 3295
 Transported for repair (0.35) 1153.25
 Transport cost ($38)  $         43,823.50

 
Working 9: Flexible Budget. The business is expected to have a 20% sales increase.

Planned Versus Actual Operating Income Statement
 For the year July 2015 to June 2016
 Details  Actual  Budget
 Total Revenue  $  1,061,280.00  $                 1,273,536.00
 Expenses
 Owner Salaries  $      180,000.00  $                     216,000.00
 Owner Salaries: Bonus 5% of revenue  $        53,064.00  $                       63,676.80
 Major repairs:salaries  $      172,000.00  $                     206,400.00
 Minor repairs:Wages employees  $      151,032.00  $                     181,238.40
 Rush jobs: Wages  $           4,455.00  $                         5,346.00
 Materials for New Tables  $        75,600.00  $                       90,720.00
 Replacement Parts  $      222,647.60  $                     267,177.12
 Transportation  $        43,823.50  $                       52,588.20
 $      902,622.10  $                 1,083,146.52
 Contribution  $      158,657.90  $                     190,389.48
 Advertising  $        17,000.00  $                       17,000.00
 Depreciation  $           6,000.00  $                         6,000.00
 Office  $        52,000.00  $                       52,000.00
 Miscellaneous  $           7,300.00  $                         7,300.00
 $        82,300.00  $                       82,300.00
 Operating Profit  $        76,357.90  $                     108,089.48

 
 
 
Working 10

Wildwood Creations Ltd
 Financial Year 2016-2017
 Reconciliation of Profit and Loss in the Income Statement
 Particulars  Dr  Cr
 Budget Profit  $                       43,631.00
 Budgeted Revenue  $      947,800.00
 Actual Revenue  $                 1,060,840.00
 Under payment of bonus  $           5,652.00
 Over payment of minor repair  $        48,552.00
 Overpayment of rush jobs  $              405.00
 Over expeniture in materials in new tables  $           2,800.00
 Under payment in replacement of parts  $        22,687.60
 Underpayments in transport  $                             465.50
 Overpayment in advertising  $           2,000.00
 Underpayment in miscellaneous  $                             900.00
 Balance b/d  $  1,029,896.60  $                 1,105,836.50
 Less  $                 1,029,896.60
 Actual Profit  $                       75,939.90

 
 
 
 
 
 
 
 
 
 
Working 11

Wildwood Creations Ltd
 Planned Versus Actual Operating Income Statement
 For the year July 2015 to June 2016
 Details  Budget  Actual  Divergence
 Total Revenue  $      947,800.00  $                 1,060,840.00  $                     113,040.00 12%
 Expenses
 Owner Salaries  $      180,000.00  $                     180,000.00  $                                      – 0%
 Owner Salaries: Bonus 5% of revenue  $        47,390.00  $                       53,042.00  $                         5,652.00 12%
 Major repairs:salaries  $      172,000.00  $                     172,000.00  $                                      – 0%
 Minor repairs:Wages employees  $      102,480.00  $                     151,032.00  $                       48,552.00 47%
 Rush jobs: Wages  $           4,050.00  $                         4,455.00  $                             405.00 10%
 Materials for New Tables  $        72,800.00  $                       75,600.00  $                         2,800.00 4%
 Replacement Parts  $      199,960.00  $                     222,647.60  $                       22,687.60 11%
 Transportation  $        44,289.00  $                       43,823.50  $                           (465.50) -1%
 $      822,969.00  $                     902,600.10
 Contribution  $      124,831.00  $                     158,239.90
 Advertising  $        15,000.00  $                       17,000.00  $                         2,000.00 13%
 Depreciation  $           6,000.00  $                         6,000.00  $                                      – 0%
 Office  $        52,000.00  $                       52,000.00  $                                      – 0%
 Miscellaneous  $           8,200.00  $                         7,300.00  $                           (900.00) -11%
 $        81,200.00  $                       82,300.00  $                         1,100.00 1%
 Operating Profit  $        43,631.00  $                       75,939.90  $                       32,308.90 74%

 
 
Working 12: Actual
Working 13

Incomes  (Budgeted)  Quotation per work
 Minor repair  $           1,830.00  $                             320.00  $  585,600.00
 Rush Jobs  $                 50.00  $                             160.00  $      8,000.00
 Total  $  593,600.00
 Gross Income  $  398,710.00