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Flexible Budget: EXERCISE 9–4 Prepare a Flexible Budget Performance Report [LO4] Vulcan Flyovers offers scenic overflights of Mount St. Helens, the volcano in Washington State that explosively erupted in 1982. Data concerning the company’s operations in July appear below: The Terminator Inc. Variance Report For the Month Ended April 30 Planning Budget Actual Results Jobs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100105 Rev enue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19, 500$20, 520$1, 020F Expenses : Mobi l et eam oper at i ngcos t s. . .10, 000 10, 320320U Ext er mi nat i ngsuppl i es. . . . . . . . . . . .1, 800960 840F Adv er t i si ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .800800 0 Di spat c hi ngcos t s. . . . . . . . . . . . . . . . . . . .2, 200 2, 340140U Officer ent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 800 1, 8000 I nsur anc e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2, 100 2, 1000 Tot al expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18, 700 18, 320380F Netoper at i ngi ncome. . . . . . . . . . . . . . . . . .$800$ 2, 200$1, 400F

Is the above variance report useful for evaluating how well revenues and costs were controlled during April? Why, or why not?

Solution of 9-4:

Requirement 01: Vulcan Flyovers Flexible Budget Performance Report Particulars

Actual Results (1)

Flights (q)

48

Flexible Activity Flexible Budget Variance Budget Variance (4) = (3–5) (3) (2) = (1–3) 0 48 2 UF

Static Budget/Planned Budget (5) 50

Revenues ($320.00q) Wages & Salaries ($4,000+82.00q)

$13,650

$1,710 UF

$15,360

640 UF

$16,000

8,430

494 UF

7,936

164 F

8,100

Fuel ($23.00q) Airport Fees ($650+ $38.00q)

1,260 2,350

156 UF 124 F

1,104 2,474

46 F 76 F

1,150 2,550

Aircraft Depreciation ($7.00q)

336

0

336

14 F

350

Office Expenses ($190+$2.00q)

460

174 UF

286

4F

290

Total Expenses

12,836

700 UF

12,136

304 F

12,440

Net Operating Income

$814

$2,410 UF

$3,224

$336 UF

$3,560

Requirement 02: The overall $336 unfavorable activity variance is due to activity falling below what had been planned for the month. The $1,710 unfavorable revenue variance is very large relative to the company’s net operating income & should be investigated. The $494 unfavorable spending variance for wages & salaries is also large and should be investigated. The other spending variances are relatively small, but are worth some management attention –– Particularly if they recur next month.

EXERCISE 9–8 Flexible Budget [LO1] Lavage Rapide is a Canadian company that owns and operates a large automatic carwash facility near Montreal. The following table provides data concerning the company’s costs: Fixed Cost Cost per Car per Month Washed Cleaning supplies .......................... $0.80 Electricity ...................................... $1,200 $0.15 Maintenance ................................. $0.20 Wages and salaries ...................... $5,000 $0.30 Depreciation .................................. $6,000 Rent .............................................. $8,000 Administrative expenses ............... $4,000 $0.10

For example, electricity costs are $1,200 per month plus $0.15 per car washed. The company expects to wash 9,000 cars in August and to collect an average of $4.90 per car washed. Required: Prepare the company’s planning budget for August. Solution of 9–8: Lavage Rapide Planning Budget For the month ended August 31 Particulars Budgeted Cars Washed (q) Revenue ($4.90q) Cleaning Supplies ($0.80q) Electricity (1,200+0.15q) Maintenance (0.20q) Wages & Salaries (5,000+0.30q) Depreciation ($6,000) Rent ($8,000)

Planning Budget 9000 $44,100 7,200 2,550 1,800 7,700 6,000 8,000

Administrative Expenses ($4,000+0.10q) Total Costs Net Operating Income

4,900 38,150 $5,950

EXERCISE 9–15 Flexible Budgets and Revenue and Spending Variances [LO1, LO3] Via Gelato is a popular neighborhood gelato shop. The company has provided the following data concerning its operations: Fixed Variable Actual Element Element Total for per Month per Liter June Revenue ................................ $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: Prepare a report showing Via Gelato revenue and spending variances for June. Solution of 9–15 Via gelato Flexible Budget Performance Report Particulars

Actual Results (1)

Flexible Budget Variance (2) = (1–3)

Flexible Budget (3)

Activity Variance (4) = (3–5)

Static Budget/Planned Budget (5)

Number of liters (q) Revenue (12.00q) Raw

6,200 liters 71,450

0

6,200

200 F

6000 liters

2,860 UF

(6,200×12) = 74,400

2,400 F

29,230

400 UF

(6,200×4.65) =

930 UF

(6,000× $12.00) = 72,000 (6,000 × $4.65)

Materials (4.65q) Wages (5,600 + 1.40q) Utilities (1630+0.20q) Rent Insurance Miscellaneous (650+0.35q) Total Costs Net Operating Income

28,830 13,680

420F

3,270

400 UF

2,600 1,350 2,590

0 0 230 F

52,900 18,640

150 UF 3,010 UF

= 27,900

{5600+(1.40×6,200)} = 14,280 {1,630+(0.20×6,200) } = 2,870

280 UF

2,600 1,350 {650+(0.35×6,200)} = 2,820 52,750 21,650

0 0 70 UF

40 UF

1,320 UF 1,080 F

{5600+(1.40×6,000)} = 14,000 {1,630+(0.20×6,000) } = 2,830 2,600 1,350 {650+(0.35×6,000)} = 2,750 51,430 20,570

EXERCISE 9–16 Flexible Budget Performance Report [LO1, LO4] AirQual Test Corporation provides on-site air quality testing services. The company has provided the following data concerning its operations: Fixed Variable Actual Component Component Total for per Month per Job February Revenue ................................. ................ $360 $18,950 Technician wages ................................... $6,400 $6,450 Mobile lab operating expenses .............. $2,900 $35 $4,530 Office expenses ................................ ..... $2,600 $2 $3,050 Advertising expenses ............................. $970 $995 Insurance ............................... ................ $1,680 $1,680 Miscellaneous expenses ........................ $500 $3 $465 The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses should be $2,900 plus $35 per job, and the actual mobile lab operating expenses for February were $4,530. The company expected to work 50 jobs in February, but actually worked 52 jobs. Required: Prepare a flexible budget performance report showing AirQual Test Corporation’s activity variances and revenue and spending variances for February. Solution of 9-16 Air Qual Test Corporation Flexible Budget Performance Report

Particulars

Actual Results (1)

Flexible Budget Variance (2) = (1–3)

Flexible Budget (3)

Activity Variance (4) = (3–5)

Static Budget/ Planned Budget(5)

Number of jobs (Q) Revenues ($360 Q)

52

0

52

2F

50

18,950

230 F

52 × $360 =$18,720

720 F

50 × $360 = $18,000

Technician Wages

$6,450

50 UF

$6,400

0

$6,400

Mobile Lab Operating Expenses ($2,900+35Q)

$4,530

190 F

{2,900+(35×52)} =$4,720

70 UF

{2,900+(35×50)} = $4,650

Office Expense ($2600 + 2Q)

$3,050

346 UF

{2,600+(2 × 52)} = $2,704

4 UF

{2,600+(2 × 50)} =2,700

Advertising Expense Insurance Expense Miscellaneous Expense (500 + 3Q)

$995

25 UF

$970

0

$970

$1,680

0

$1,680

0

$1680

$465

191 F

{500+(3 × 52)} = 656

6 UF

{500+(3 × 50)} = 650

17,170 1,780

40 UF 190 F

17,130 1,590

80 UF 640 F

17,050 950

Total Costs Net Operating Income

EXERCISE 9–17 Working with More Than One Cost Driver [LO4, LO5] The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers that it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 50 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

Fixed Cost Cost per Cost per per Month Course Student Instructor wages ................... $3,080 Classroom supplies .............. $260 Utilities .................... .............. $870 $130 Campus rent ......................... $4,200 Insurance ................. ............. $1,890 Administrative expenses ....... $3,270 $15 $4 For example, administrative expenses should be $3,270 per month plus $15 per course plus $4 per student. The company’s sales should average $800 per student. The actual operating results for September appear below: Actual Revenue .......................................... $32,400 Instructor wages ............................. $9,080 Classroom supplies ........................ $8,540 Utilities ............................................ $1,530 Campus rent ................................... $4,200 Insurance ........................................ $1,890 Administrative expenses ................. $3,790

Required: 1. The Gourmand Cooking School expects to run three courses with a total of 45 students in September. Prepare the company’s planning budget for this level of activity. 2. The school actually ran three courses with a total of 42 students in September. Prepare the company’s flexible budget for this level of activity. 3. Prepare a flexible budget performance report that shows both activity variances and revenue and spending variances for September. Solution of 9–17: The Gourmand Cooking School Flexible Budget Performance Report Particulars

Actual Results (1)

Number of Students (Q) Number of Courses Revenue ($800 Q1) Instructor Wages ($3,080 Q2)

Flexible Budget (3)

42

Flexible Budget Variance (2) = (1–3) 0

3

Static Budget/ Planned Budget(5)

42

Activity Variance (4) = (3– 5) 3

0

3

0

3

$32,400

1200 UF

2,400 UF

$9,080

160 F

42 × $800 =$33,600 3,080 × 3 =$9,240

45 × $800 =$36,000 3,080 × 3 =$9,240

Classroom Supplies ($260 Q2)

$8,540

2,380 F

260 × 42 = $10,920

780 F

260 × 45 =$11,700

Utilities ($870+ 130Q2) Campus Rent

$1,530

270 UF

0

$4,200

0

{870+(130×3)} =1,260 $4,200

0

{870+(130×3)} =1,260 $4,200

Insurance

$1,890

0

1,890

0

1,890

Administrative Expenses ($3,270 + 15 Q2 + 4 Q1) Total Costs

$3,790

307 UF

{3,270+(15×3+4×42) } = 3,483

12 F

{3,270+(15×3+4×45) } = 3,495

29,030

763 F

30,993

792 F

31,785

0

45

Net Operating Income

3,370

437 UF

2,607

1,608 UF

4,215

EXERCISE 9–14 Flexible Budgets and Activity Variances [LO1, LO2] Jake’s Roof Repair has provided the following data concerning its costs:

Fixed Cost Cost per per Month Repair-Hour Wagesandsal ar i es. . . . . . . . . . . . . . $23, 200$16. 30 Par t sandsuppl i es. . . . . . . . . . . . . . . .$8. 60 Equi pmentdepr ec i at i on. . . . . . . .$1, 600 $0. 40 Tr uckoper at i ngexpenses. . . . .$6, 400 $1. 70 Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3, 480 Admi ni st r at i v eexpenses. . . . . . .$4, 500 $0. 80

For example, wages and salaries should be $23,200 plus $16.30 per repair-hour. The company expected to work 2,800 repair-hours in May, but actually worked 2,900 repair-hours. The company expects its sales to be $44.50 per repair-hour. Required: Prepare a report showing the company’s activity variances for May. Solution of 9–14 Jake’s Roof Repair Activity Variances Particulars

Flexible Budget

Repair–Hours (q) Revenue ($44.50Q) Wages & Salaries ($23,200+$16.30q) Parts & Supplies ($8.60q) Equipment Depreciation ($1,600+ $0.40q) Truck Operating Expenses

2,900 $1,29,050 {23,200+(2,900×$16.30) } =70,470 2,900×$8.60 =24,940 {1,600+(2,900×$0.40)} =2,760

Static Budget /Planned Budget 2,800 $1,24,600 {23,200+(2,800×$16.30) } =68,840 2,800×$8.60 =24,080 {1,600+(2,800×$0.40)} =2,720

Activity Variances 100 F $4,450 F 1,630 UF

{$6,400+(2,900×$1.70)} = 11,330

{$6,400+(2,800×$1.70)} = 11,160

170 UF

860 UF 40 UF

($6,400+$1.70q) Rent ($3,480) Administrative Expenses ($4,500+ $0.80q) Total Costs Net Operating Income

3,480 {4,500+(2,900×$0.80)} = 6,820

3,480 {4,500+(2,800×$0.80)} = 6,740

0 80 UF

1,19,800 $9,250

1,17,020 $7,580

2,780 UF $1,670 F

7-25 Materials and manufacturing labor variances, standard costs. Dunn, Inc., is a privately held furniture manufacturer. For August 2014, Dunn had the following standards for one of its products, a wicker chair:

Direct materials Direct manufacturing labor

Standards per Chair 2 square yards of input at $5 per square yard 0.5 hour of input at $10 per hour

The following data were compiled regarding actual performance: actual output units (chairs) produced: 2,000; square yards of input purchased and used, 3,700; price per square yard, $5.10; direct manufacturing labor costs, $8,820; actual hours of input, 900; labor price per hour, $9.80. 1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred. 2. Suppose 6,000 square yards of materials were purchased (at $5.10 per square yard), even though only 3,700 square yards were used. Suppose further that variances are identified at their most timely control point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach. Solution of 7–25 (Horngren) Requirement 01: Budgeted / Standard Material Price $5 Budgeted Quantity of input= 2 square yard Total quantity of input = 2000 unit × 2sq yard = 4000sq Budgeted Hour ---- 0.5 h Labor price per hour $10

Actual Quantity 2000 unit Material Price $5.10 Actual Quantity of Input =3,700sq yard Actual Total Hour 900 h Labor cost per hour $9.80

Direct Material: Price Variance = (actual input price – budgeted input price) × actual quantity of input = ($5.10 – $5.00) × 3700sq yard = $370 UF Efficiency Variance = (actual quantity of input – budgeted quantity of input) × budgeted price

= (3700sq – 4000sq) × 5.00 = 1500 F Direct Material Variance = Price + Efficiency = $370 UF + $1500 F = $1130 F Direct Manufacturing Labor: Price Variance = (actual cost price – budgeted cost price) × actual quantity of input = ($9.80 – $10) × 900h = $180 F Efficiency Variance = (actual quantity of input – budgeted quantity of input) × budgeted price = (900h – 1000h) × $10 = $1000F Direct Manufacturing Labor Variance = Price + Efficiency = $180 F +$1000 F = $1180 F Solution of 7–24 (Horngrane): Direct Material: Price Variance = (actual input price – budgeted input price) × actual quantity of input = ($4.65 – $4.50) × 98055 = $14,708.25 UF Efficiency Variance = (actual quantity of input – budgeted quantity of input) × budgeted price = (98,055 lb – 98,500 lb) × 4.5 = 2003 F Direct Material Variance = Price + Efficiency = $14708.25 UF + $2003 F = $12,705 UF Direct Manufacturing Labor:

Price Variance = (actual cost price – budgeted cost price) × actual quantity of input = ($31.5 – $30) × 4900h = $7,350 UF Efficiency Variance = (actual quantity of input – budgeted quantity of input) × budgeted price = (4900h – 4925h) × $30 = $750 F Direct Manufacturing Labor Variance = Price + Efficiency = $7350 UF +$750 F = $6600 UF...