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Chapter 10
Flexible Budgets and Performance Analysis
Solutions to Questions
10-1 The planning budget is prepared for the
10-2 A flexible budget can be adjusted to
and is not subsequently adjusted.
10-3 Actual results can differ from the budget
in how effectively resources are managed.
10-4 As noted in 10-3 above, a difference
From a manager’s perspective, a variance that is
due to a change in activity is very different from
very different actions from a variance of the
second kind. Consequently, these two kinds of
are lumped together.
10-5 An activity variance is the difference
to the difference in the level of activity assumed
in the planning budget and the actual level of
labels are perhaps misleading for activity
variances that involve costs. A “favorable”
level of activity. An “unfavorable” activity
variance for a cost occurs because the cost has
10-6 A revenue variance is the difference
between how much the revenue should have
revenue variance occurs because the revenue is
greater than expected for the actual level of
activity. An unfavorable revenue variance occurs
10-7 A spending variance is the difference
between how much a cost should have been,
straight-forward. A favorable spending variance
occurs because the cost is lower than expected
activity.
10-8 In a flexible budget performance report,
and actual results. The differences between the
static planning budget and the flexible budget
budget performance report cleanly separates the
differences between the static planning budget
the effectiveness with which resources are
managed (the revenue and spending variances).
When two cost drivers exist, some costs may be
a function of the first cost driver, some costs
10-10 When the static planning budget is
This assumption is valid only for fixed costs.
However, it is unlikely that all costs are fixed.
Some are likely to be variable or mixed.
and then directly compared to actual results, it
is implicitly assumed that costs should change in
mixed.
Exercise 10-1 (10 minutes)
Gator Divers
Flexible Budget
For the Month Ended March 31
Actual diving-hours .......................................
190
Revenue ($380.00q) .....................................
$72,200
Expenses:
Wages and salaries ($12,000 + $130.00q) ...
36,700
Supplies ($5.00q) .......................................
950
Equipment rental ($2,500 + $26.00q) .........
7,440
Insurance ($4,200) .....................................
4,200
Miscellaneous ($540 + $1.50q) ...................
825
Total expense ...............................................
50,115
Net operating income ....................................
$22,085
Exercise 10-4 (20 minutes)
1.
Mt. Hood Air
Flexible Budget Performance Report
For the Month Ended August 31
Planning
Budget
Activity
Variances
Flexible
Budget
Revenue
and
Spending
Variances
Actual
Results
Flights (q) ......................................
50
52
52
Revenue ($360.00q) .......................
$18,000
$720
F
$18,720
$1,740
U
$16,980
Expenses:
Wages and salaries
($3,800 + $92.00q) ...................
8,400
184
U
8,584
44
F
8,540
Fuel ($34.00q) .............................
1,700
68
U
1,768
162
U
1,930
Airport fees ($870 + $35.00q) ......
2,620
70
U
2,690
0
2,690
Aircraft depreciation ($11.00q) .....
550
22
U
572
0
572
Office expenses ($230 + $1.00q) ..
280
2
U
282
168
U
450
Total expense .................................
13,550
346
U
13,896
286
U
14,182
Net operating income .....................
$ 4,450
$374
F
$ 4,824
$2,026
U
$ 2,798
2. The overall activity variance is $374 favorable and is due to an increase in activity. The $1,740
unfavorable revenue variance is very large relative to the company’s net operating income and should
be investigated. Was this due to discounts given or perhaps a lower average number of passengers
per flight than usual? The other variances are relatively small, but are worth some management
attention—particularly if they recur next month.
