Niforos Air uses two measures of activity, flights and passengers, in the cost formulas in its budgets and performance reports. The cost formula for plane operating costs is $41,380 per month plus $2,282 per flight plus $14 per passenger. The company expected its activity in August to be 77 flights and 264 passengers, but the actual activity was 78 flights and 261 passengers. The actual cost for plane operating costs in August was $216,740. The plane operating costs in the flexible budget for August would be closest to:
A) $220,790
B) $223,030
C) $223,657
D) $216,740

Question

Quizplus · Accepted Answer

Using the cost formula given, we can calculate the flexible budget for plane operating costs in August as follows:

Flexible budget = $41,380 + ($2,282 x 78) + ($14 x 261) 
Flexible budget = $41,380 + $178,236 + $3,654 
Flexible budget = $223,270

The actual cost for plane operating costs in August was $216,740. Comparing this to the flexible budget, we can calculate the flexible budget variance as:

Flexible budget variance = Actual cost - Flexible budget 
Flexible budget variance = $216,740 - $223,270 
Flexible budget variance = -$6,530

Since the actual cost was lower than the flexible budget, the flexible budget needs to be decreased. Looking at the answer choices, option B is the closest to the adjusted flexible budget of $216,740 - $6,530 = $210,210.

Niforos Air Uses Two Measures of Activity, Flights and Passengers