Quiz 9: Flexible Budgets and Performance Analysis

Gator Divers is a company that provides diving services such as underwater ship repairs to clients in the Tampa Bay area. The company's planning budget for March appears below: Required: During March, the company's activity was actually 190 diving-hours. Prepare a flexible budget for that level of activity.

What is a static planning budget

Air Meals is a company that prepares in-flight meals for airlines in its kitchen located next to the local airport. The company's planning budget for December appears below: In December. 21,000meals were actually served. The company's flexible budget for this level of activity is as follows: Required: 1. Prepare a report showing the company's activity variances for December, 2. Which of the activity variances should be of concern to management Explain.

What is a flexible budget and how does it differ from a static planning budget

Olympia Bivalve farms and sells oysters in the Pacific Northwest. The company harvested and sold 7,000 pounds of oysters in July. The company's flexible budget for July appears below: The actual results for July appear below: Required: Prepare a report showing the company's revenue and spending variances for July.

What are some of the possible reasons that actual results may differ from what had been budgeted at the beginning of a period

Mt. Hood Air offers scenic overflights of Mt. Hood and the Columbia River gorge. Data concerning the company's operations in August appear below: The company measures its activity in terms of flights. Customers can buy individual tickets for overflights or hire an entire plane for an over flight at a discount. Required: 1. Prepare a flexible budget performance report for August. 2. Which of the variances should be of concern to management Explain.

Why is it difficult to interpret a difference between how much expense was budgeted and how much was actually spent

Icicle Bay Tours operates day tours of coastal glaciers in Alaska on its tour boat the Emerald Glacier. Management has identified two cost drivers - the number of cruises and the number of passengers - that it uses in its budgeting and performance reports. The company publishes a schedule of day cruises that it may supplement with special sailings if there is sufficient demand. Up to 80 passengers can be accommodated on the tour boat.Data concerning the company's cost formulas appear below: For example, vessel operating costs should be $ 6,800 per month plus $ 475.00 per cruise plus $3.50 per passenger.The company's sales should average $28.00 per passenger. The company's planning budget for August is based on 58 cruises and 3,200 passengers. Required: Prepare the company's planning budget for August.

What is an activity variance and what does it mean

The Exterminator Inc. provides on-site residential pest extermination services. The company has several mobile teams who are dispatched from a central location in company - owned trucks. The company uses the number of jobs to measure activity. At the beginning of May, the company budgeted for 200 job , but the actual number of job, turned out to be 208. A report comparing the budgeted revenues and costs to the actual revenues and costs appears below: Required: Is the above variance report useful for evaluating how well revenues and costs were controlled during May Why or why not

What is a revenue variance and what does it mean

Refer to the data for The Exterminator Inc. in Exercise 9-6. A management intern has suggested that the budgeted revenues and costs should be adjusted for the actual level of activity in May before they are compared to the actual revenues and costs. Because the actual level of activity was 4% higher than budgeted, the intern suggested that all budgeted revenues and costs should be adjusted upward by4%.A report comparing the budgeted revenues and costs, with this adjustment, to the actual revenues and costs appears below: Required: Is the above variance report useful for evaluating how well revenues and costs were controlled during May Why or why not

What is a spending variance and what does it mean

Harold's , Roof Repair has provided the following data concerning its costs: For example. wages and salaries should be $ 21,380 plus $ 15.80 per repair-hour. The company expected to work 2.500 repair-hours in June , but actually worked 2,400 repair-hours. The company expects its sales to be $43.50 per repair-hour. Required: Prepare a report showing the company's activity variances for June.

What does a flexible budget performance report do that a simple comparison of budgeted to actual results does not do

Auto Lavage is a Canadian company that owns and operates a large automatic carwash facility near Quebec. The following table provides data concerning the company's costs: For example, electricity costs are $1,400 per month plus $0.10 per car washed. The company expects to wash 8,000 cars in October and to collect an average of $5.90 per car washed. Required: Prepare the company's planning budget for October.

How does a flexible budget based on two cost drivers differ from a flexible budget based on a single cost driver

Refer to the data for Auto Lavage in Exercise9- 9.The company actually washed 8,100 cars in October. Required: Prepare the company's flexible budget for October.

What assumption is implicitly made about cost behavior when a budget is directly compared to actual results Why is this assumption questionable

Refer to the data for Auto Lavage in Exercise 9-9.The actual operating results for October.appear below: Required: Prepare a report showing the company's activity variances for October.

What assumption is implicitly made about cost behavior when all of the items in a budget are adjusted in proportion to a change in activity Why is this assumption questionable

Refer to the data for Auto Lavage in Exercises 9- 9 and 9- 11. Required: Prepare a report showing the company's revenue and spending variances for October.

Refer to the data for Auto Lavage in Exercises 9 - 9 and 9 - 11. Required: Prepare a flexible budget performance report that shows the company's activity variances and revenue and spending variances for October.

Pierr Manufacturing Inc. has provided the following information concerning its manufacturing costs: For example. utilities should be $1,600 per month plus $0.15 per machine-hour. The company expects to work 4,000machine-hours in July. Note that the company's direct labor is a fixedcost. Required: Prepare the company's planning budget for manufacturing costs for July.

Wings Flight School offers flying lessons at a small municipal airport. The school's owner and manager has been attempting to evaluate performance and control costs using a variance reportthat compares the planning budget to actual results.Arecent variancereport appears below: After several months of using such variance reports. the owner has become frustrated. For example. she is quite confident that instructor wages were very tightly controlled in August. but the report shows an unfavorable variance. The planning budget was developed using the following formulas. where q is the number of lesson, sold: Required: 1. Should the owner feel frustrated with the variance reports Explain. 2. Prepare a flexible budget performance report for the school forAugust. 3. Evaluate the school's performance for August.

The Toque Cooking Academy 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 four courses in a month and have a total of 60 students enrolled in those four courses. Data concerning the company's cost formulas appear below: For example, administrative expenses should be $3,940 per month plus $46 per course plus $7 per student. The company's sales should average $850 per student. The actual operating results for October appear below: Required: 1. The Toque Cooking Academy expects to run four courses with a total of 60 students in October. Prepare the company's planning budget for this level of activity. 2. The school actually ran four courses with a total of 58 students in October. Prepare the companys 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 October.

Gelato Supremo is a popular neighborhood gelato shop. The company has provided the following data concerning its operations: 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 $4,800 plus $1.20 per liter of gelato sold. and the actual wages for July were $ 11,200. Gelato Supremo expected to sell 5,000 liters in July. but actually sold 4,900 liters. Required: Prepare a report showing Gelato Supremo revenue and spending variances for July.

Air Assurance Corporation provides on-site air quality testing services.The company has provided the following data concerning its operations: The company uses the number of jobs as its measure of activity. Forexample, mobile lab operating expenses should be $4,900 plus $29 per job, and the actual mobile lab operating expenses for March were $7,960. The company expected to work 100 jobs in March, but actually worked 98 jobs. Required: Prepare a flexible budget performance report showing Air Assurance Corporation's activity variances and revenue and spending variances for March.

Triway Packaging Corporation manufactures and sells a wide variety of packaging products. Performance reports are prepared monthly for each department. The planning budget and flexible budget fur the Production Department are based on the following formulas. where q is the number of direct labor-hours worked in a month: The actual costs incurred in November in the Production Department are listed below: Required: 1. The company had budgeted for an activity level of 4.000 labor - hours in November. Prepare the Production Department's planning budget for the month. 2. The company actually worked 3,800 labor-hours in November. Prepare the Production Depart ment's flexible budget for the month. 3. Prepare the Production Department's flexible budget performance report for November. including both the activity and spending variances. 4. What aspects of the flexible budget performance report should be brought to management's attention Explain.

You have just been hired by Securi Door Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company's costing system and "do what you can to help us get better control of our manufacturing overhead costs." You find that the company has never used a flexible budget, and you suggest that preparing such a budget would be an excellent first step in overhead planning and control. After much effort and analysis. you determined the following cost formulas and gathered the following actual cost data for April: During April. the company worked 18,000 machine-hours , and produced 12,000 units. The company had originally planned to work 20,000 machine-hours during April. Required: 1. Prepare a report showing the activity variances for April. Explain what these variances mean. 2. Prepare a report showing the spending variances for April. Explain what these variances mean

Verona Pizza is a small neighborhood pizzeria that has a small area for in-store dining as well offering takeout and free home delivery services. The pizzeria's owner has determined that the shop has two major cost drivers - the number of pizzas sold and the number of deliveries made. Data concerning the pizzeria's costs appear below: In October. the pizzeria budgeted for 1,500 pizzas at an average selling price of $ 13,00 per pizza and for 200 deliveries. Data concerning the pizzeria's operations in October appear below: Required: 1. Prepare a flexible budget performance report that shows both activity variances and revenue and spending variances for the pizzeria for October. 2. Explain the activity variances

The KGV Blood Bank, a private charity partly supported by government grants, is located on the Caribbean island of St. Lucia. The blood bank has just finished its operations for September. which was a particularly busy month due to a powerful hurricane that hit neighboring islands causing many injuries. The hurricane largely bypassed St. Lucia, but residents of St. Lucia willingly donated their blood to help people on other islands. As a consequence, the blood bank collected and processed over 20% more blood than had been originally planned for the month. A report prepared by a government official comparing actual costs to budgeted costs for the blood bank appears on the following page. (The currency on St. Lucia is the East Caribbean dollar.) Continued support from the govemment depends on the blood bank's ability to demonstrate control over its costs. The managing director of the blood bank was very unhappy with this report. claiming that his cost were higher than expected due to the emergency on the neighboring islands. He also pointed out that the additional costs had been fully covered by payments from grateful recipients on the other islands. The government official who prepared the report countered that all of the figures had been submitted by the blood bank to the govemment : he was just pointing out that actual costs were a lot higher than promised in the budget. The following cost formulas were used to construct the planning budget: Required: I. Prepare a new performance report for September using the flexible budget approach. 2. Do you think any of the variances in the report you prepared should be investigated Why

Several years ago, Shipley Corporation developed a comprehensive budgeting system for profit planning and control purposes.While departmental supervisors have been happy with the system, the factory manager has expressed considerable dissatisfaction with the information being generated by the system. A typical departmental cost report for a recent period follows: After receiving a copy of this cost report, the supervisor of the Assembly Department stated. "These reports are super. It makes me feel really good to see how well things are going in my department. I can't understand why those people upstairs complain so much about the reports". For the last several years. the company's marketing department has chronically failed to meet the sales goals expressed in the company's monthly budgets. Required: 1. The company's president is uneasy about the cost reports and would like you to evaluate their usefulness to the company. 2. What changes, if any, should be made in the reports to give better insight into howwell departmental supervisors are controlling costs 3. Prepare a new performance report for the quarter, incorporating any changes you suggested in question (2) above. 4. How well were costs controlled in the Assembly Department in March

Sue Jaski. supervisor of the Karaki Corporation's Machining Department. was visibly upset after being reprimanded for her department's poor performance over the prior month. The department's cost control report is given below: "I just can't understand all the red ink, " jaski complained to the supervisor of another department. " When the boss called me in, I thought he was going to give me a pat on the back because I know for a fact that my department worked more efficiently last month than it has ever worked before. Instead, he tore me apart. I thought for a minute that it might be over the supplies that were stolen out of our warehouse last month. But they only amounted to a couple of hundred dollars, and just look at this report. Everything is unfavorable." Direct labor wages and supplies are variable costs; supervision and depreciation are fixed costs; and maintenance and utilities are mixed costs.The fixed component of the budgeted maintenance cost is $12,100; the fixed component of the budgeted utilities cost is $12,800. Required: 1. Evaluate the company's cost control report and explain why the variances were all unfavorable. 2. Prepare a performance report that will help Ms. Jaski's superiors assess how well costs were controlled in the Machining Department.

Facilitator Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Suchswaps, known as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below : Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $209 per exchange completed on the planning budget:whereas, the average actual office expense is $172 per exchange completed. Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depreciation. rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $4,100. All of the company's revenues come from fees collected when an exchange is completed. Required: 1. Evaluate the report prepared by the bookkeeper. 2. Prepare a performance report that would help the owner/manager assess the performance of the company in May. 3. Using the report you created, evaluate the performance of the company in May.

Lance Prating is the controller of the Colorado Springs manufacturing facility of PrudhomEnterprises, Inc.The annual cost control report is one of the many reports that must be filed with corporate headquarters and is due at corporate headquarters shortly after the beginning of the New Year. Prating does not like putting work off to the last minute. so just before Christmas he prepared a preliminary draft of the cost control report.Some adjustments would later be required for transactions that occur between Christmas and New Year's Day. A copy of the preliminary draft report. which Prating completed on December 21, follows: Tab Kapp, the general manager at the Colorado Springs facility, asked to see a copy of the preliminary draft report. Prating carried a copy of the report to Kapp's office where the following discussion took place: Kapp : Wow! Almost all of the variances on the report are unfavorable,The only favorable variances are for supervisory salaries and industrial engineering, How did we have an unfavorable variance for depreciation Prating : Do you remember that milling machine that broke down because the wrong lubricant was used by the machine operator Kapp : Yes, Prating : We couldn't fix it. We had to scrap the machine and buy a new one. Kapp : This report doesn't look good. I was raked over the coals last year when we had just a few unfavorable variances. Prating : I'm afraid the final report is going to look even worse. Kapp : Oh Prating : The line item for industrial engineering on the report is for work we hired SanchezEngineering to do for us. The original contract was for $160,000, but we asked them to do some additional work that was not in the contract. We have to reimburse Sanchez Engineering for the costs of that additional work. The $154,000 in actual costs that appears on the preliminary draft report reflects only their billings up through December 21. The last bill they had sent us was on November 28. and they completed the project just last week. Yesterday I got a call from Mary Jurney over at Sanchez and she said they would be sending us a final bill for the project before the end of the year.The total bill , including the reimbursements for the additional work, is going to be … Kapp : I am not sure I want to hear this. Prating : $176,000 Kapp : Ouch! Prating : The additional work added $16,000 to the cost of the project. Kapp : I can't turn in a report with an overall unfavorable variance! They'll kill me at corporate headquarters. Call up Mary at Sanchez and ask her not to send the bill until after the first of the year. We have to have that $6,000 favorable variance for industrial engineering on the report. Required: What should Lance Prating do Explain.

Farrar University offers an extensive continuing education program in many cities throughout the state, For the convenience of its faculty and administrative staff and to save costs, the university operates a motor pool. The motor pool operated with 20 vehicles until February, when an additional automobile was acquired at the request of the university administration. The motor pool furnishes gasoline, oil, and other supplies for its automobiles.A mechanic does routine maintenance and minor repairs. Major repairs are performed at a nearby commercial garage. Each year. the supervisor of the motor pool prepares an annual budget,which is reviewed by the university and approved after suitable modifications. The following cost control report show, actual operating costs for March of the current year compared to one-twellth of the annual budget. The annual budget was based on the following assumptions: a. $ 0.16 per mile for gasoline. b. $0.05 per mile for oil.minor repairs. and parts. c. $ 480 per automobile per year for outside repairs. d. $900 per automobile per year for insurance. e. $ 8.610 per month for salaries and benefits. f. $ 2,400 per automobile per year for depreciation. The supervisor of the motor pool is unhappy with the report. claiming it paints an unfair picture of the motor pool's performance. Required: 1. Prepare a new performance report for March based on a flexible budget that shows spending variances. 2. What are the deficiencies in the original cost control report How does the report that you prepared in part (1) above overcome these deficiencies

The Munchkin Theater is a nonprofit organization devoted to staging plays for children.The theater has a very small full-time professional administrative staff. Through a special arrangement with the actors' union, actors and directors rehearse without pay and are paid only for actual performances. The costs from the current year's planning budget appear below. The Munchkin Theater had tentatively planned to put on five different productions with a total of 60 performances. For example. one of the productions was PeterRabbit, which had five performances. Some of the costs vary with the number of productions. some with the number of performances. and some are fixed and depend on neither the number of productions nor the number of performances The costs of scenery. costumes. props. and publicity vary with the number of productions. It doesn't make any difference how many times Peter Rabbit is performed. the cost of the scenery is the same. Likewise, the cost of publicizing a play with posters and radio commercials is the same whether there are 10, 20, or 30 performances of the play. On the other hand. the wages of the actors, directors, stagehands, ticket booth personnel, and ushers vary with the number of performances. The greater the number of performances, the higher the wage costs will be. Similarly, the costs of renting the hall and printing the programs will vary with the number of performances. Administrative expenses are more difficult to pin down, but the best estimate is that approximately 75% of the budgeted costs are fixed, 15% depend on the number of productions staged, and the remaining 10% depend on the number of performances. After the beginning of the year, the board of directors of the theater authorized changing the theater's program to four productions and a total of 64 performances. Actual costs were higher than the costs from the planning budget. (Grants from donors and ticket sales were also correspondingly higher, but are not shown here.) Data concerning the actual costs appear below: Required: 1. Prepare a flexible budget for The Munchkin Theater based on the actual activity of the year. 2. Prepare a flexible budget performance report for the year that shows both activity variances and spending variances. 3. If you were on the board of directors of the theater, would you be pleased with how well costs were controlled during the year Why or why not 4. The cost formulas provide figures for the average cost per production and average cost per performance. How accurate do you think these figures would be for predicting the cost of a new production or of an additional performance of a particular production