Exercise 9-15 (Static) Flexible Budgets and Revenue and Spending Variances [LO9-1, LO9-3]

Via Gelato, a popular neighborhood gelato shop, provided the following cost formulas and actual results for the month of June:

 Fixed Element per MonthVariable Element per LiterActual Total for JuneRevenue
 
$ 12.00

$ 71,540

Raw materials
 
$ 4.65

$ 29,230

Wages

$ 5,600

$ 1.40

$ 13,860

Utilities

$ 1,630

$ 0.20

$ 3,270

Rent

$ 2,600
 
$ 2,600

Insurance

$ 1,350
 
$ 1,350

Miscellaneous

$ 650

$ 0.35

$ 2,590

While gelato is sold by the cone or cup, the shop measures its activity in terms of the total number of liters of gelato sold. For example, wages should be $5,600 plus $1.40 per liter of gelato sold and the actual wages for June were $13,860. Via Gelato expected to sell 6,000 liters in June but actually sold 6,200 liters.

**Required:**

Calculate Via Gelato's revenue and spending variances for June.

**Note: Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.**

To calculate the revenue and spending variances for Via Gelato, we'll follow these steps:

1. **Determine the Flexible Budget:**
   - The flexible budget is based on the actual activity level, which is 6,200 liters.

2. **Calculate the Flexible Budget Amounts:**
   - **Revenue**: Flexible budget revenue = 6,200 liters × $12.00 = $74,400
   - **Raw materials**: Flexible budget = 6,200 liters × $4.65 = $28,830
   - **Wages**: Flexible budget = $5,600 + (6,200 liters × $1.40) = $14,280
   - **Utilities**: Flexible budget = $1,630 + (6,200 liters × $0.20) = $2,870
   - **Rent**: Fixed at $2,600
   - **Insurance**: Fixed at $1,350
   - **Miscellaneous**: Flexible budget = $650 + (6,200 liters × $0.35) = $2,820

3. **Compare the Actual Results to the Flexible Budget to Find Variances:**
   - **Revenue Variance**: Actual revenue = $71,540
     - Flexible budget revenue = $74,400
     - Revenue variance = $74,400 - $71,540 = $2,860 (Unfavorable)
   
   - **Raw Materials Variance**: Actual raw materials = $29,230
     - Flexible budget raw materials = $28,830
     - Raw materials variance = $29,230 - $28,830 = $400 (Unfavorable)

   - **Wages Variance**: Actual wages = $13,860
     - Flexible budget wages = $14,280
     - Wages variance = $14,280 - $13,860 = $420 (Favorable)

   - **Utilities Variance**: Actual utilities = $3,270
     - Flexible budget utilities = $2,870
     - Utilities variance = $3,270 - $2,870 = $400 (Unfavorable)

   - **Rent Variance**: Actual rent = $2,600
     - Flexible budget rent = $2,600
     - Rent variance = $2,600 - $2,600 = $0 (None)

   - **Insurance Variance**: Actual insurance = $1,350
     - Flexible budget insurance = $1,350
     - Insurance variance = $1,350 - $1,350 = $0 (None)

   - **Miscellaneous Variance**: Actual miscellaneous = $2,590
     - Flexible budget miscellaneous = $2,820
     - Miscellaneous variance = $2,820 - $2,590 = $230 (Favorable)

4. **Summary of Revenue and Spending Variances:**

   | Item               | Actual   | Flexible Budget | Variance | Effect        |
   |--------------------|----------|-----------------|----------|---------------|
   | Revenue            | $71,540  | $74,400         | $2,860   | Unfavorable   |
   | Raw Materials      | $29,230  | $28,830         | $400     | Unfavorable   |
   | Wages              | $13,860  | $14,280         | $420     | Favorable     |
   | Utilities          | $3,270   | $2,870          | $400     | Unfavorable   |
   | Rent               | $2,600   | $2,600          | $0       | None          |
   | Insurance          | $1,350   | $1,350          | $0       | None          |
   | Miscellaneous      | $2,590   | $2,820          | $230     | Favorable     |

**Conclusion:** 
Via Gelato experienced an unfavorable revenue variance of $2,860, indicating lower than expected revenue. On the cost side, the shop had unfavorable variances in raw materials and utilities but favorable variances in wages and miscellaneous expenses.

Would you like more details or have any other questions?

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### Related Questions:
1. How would fixed costs affect a flexible budget analysis?
2. What steps can be taken to improve an unfavorable revenue variance?
3. How can a business control variable costs more effectively?
4. Why is it important to differentiate between fixed and variable costs?
5. What are some common reasons for variances in utilities expenses?

### Tip:
Regularly comparing actual performance to a flexible budget helps identify areas that need management attention and can improve future financial planning.

Exercise 9-15 (Static) Flexible Budgets and Revenue and Spending Variances [LO9-1, LO9-3] Via Gelato, a popular neighborhood gelato shop, provided the following cost formulas and actual results for the month of June. Calculate Via Gelato's revenue and spending variances for June.

Analyze the revenue and spending variances for Via Gelato, focusing on their flexible budget for June. This exercise involves cost accounting concepts like revenue variance, raw materials variance, and wage variance. Learn how to calculate variances using flexible budget formulas. Ideal for accounting students.

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