Given below is a portion of Swinging Tunes, Inc.’s management performance report:
Budget Actual Difference
Contribution margin $1,040,000 $1,020,000 $20,000
Controllable fixed costs $430,000 $420,000 $10,000
The correct answer and explanation is :
Correct Answer:
The controllable margin is calculated as follows:
[
\text{Controllable Margin} = \text{Contribution Margin} – \text{Controllable Fixed Costs}
]
For the Budgeted Controllable Margin:
[
1,040,000 – 430,000 = 610,000
]
For the Actual Controllable Margin:
[
1,020,000 – 420,000 = 600,000
]
Difference in Controllable Margin:
[
610,000 – 600,000 = 10,000 \text{ (Unfavorable)}
]
Explanation:
A management performance report is a financial statement that compares budgeted and actual results to assess managerial performance. In this case, we analyze Swinging Tunes, Inc.’s contribution margin and controllable fixed costs to determine how well the company managed its controllable costs.
Contribution Margin Analysis
The contribution margin is the revenue left after covering variable costs, which contributes to fixed costs and profit. Here, the actual contribution margin of $1,020,000 is $20,000 less than the budgeted $1,040,000, indicating lower revenue or higher variable costs.
Controllable Fixed Costs Analysis
Controllable fixed costs include expenses that managers can influence in the short run (e.g., salaries, marketing, utilities). The actual controllable fixed costs were $420,000, which is $10,000 lower than the budgeted $430,000. This reflects cost-saving measures or operational efficiency.
Overall Performance
Despite savings in controllable fixed costs, the lower contribution margin resulted in an overall $10,000 unfavorable variance in controllable margin. This means the company’s performance was slightly below expectations, possibly due to lower sales or increased variable costs.
Conclusion
Management should analyze the cause of the drop in contribution margin—whether due to lower sales, pricing issues, or higher variable costs—to take corrective action and improve future performance.