Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 71

Flexible Budget and Operating-Profit Variances Phoenix Management helps rental property owners find renters and charges the owners one-half of the first month’s rent for this service. For August 2010, Phoenix expects to find renters for 100 apartments with an average first month’s rent of $700. Budgeted cost data per tenant application for 2010 follow:

•  Professional labor: 1.5 hours at $20 per hour.

•  Credit checks: $50.

Phoenix expects other costs, including lease payment for the building, secretarial help, and utilities, to be $3,000 per month. On average, Phoenix is successful in placing one tenant for every three applicants.

Actual rental applications in August 2010 were 270. Phoenix paid $9,500 for 400 hours of professional labor. Credit checks went up to $55 per application. Other support costs in August 2010 were $3,600. The average first monthly rentals for August 2010 were $800 per apartment unit for 90 units.

Required

1. Prepare a profit-variance report similar to text Exhibit 14.4. Compute the total flexible-budget variance and the sales volume variance for Phoenix’s operations in August 2010.

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2. Determine the professional labor rate and efficiency variances for August 2010.

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3. What nonfinancial factors should Phoenix consider in evaluating the effectiveness and efficiency of professional labor?

Step 1 of 15

Variance and budget v/s variance:

In costing, variance is a difference occurred between planned, standard or budgeted cost and the actual cost incurred. These variances can be for both cost and revenue. These variances can be favourable or unfavourable.