Chapter 9 Homework This Procedure Provides Valid Benchmarks For Revenues

Chapter 9

Flexible Budgets and Performance Analysis

Solutions to Questions

9-1 The planning budget is prepared for the

planned level of activity. It is static because it is

9-2 A flexible budget can be adjusted to

reflect any level of activity—including the actual

level of activity. By contrast, a static planning

budget is prepared for a single level of activity

and is not subsequently adjusted.

9-3 Actual results can differ from the budget

for many reasons. Very broadly speaking, the

9-4 As noted in 9-3 above, a difference

between the budget and actual results can be

due to many factors. Most importantly, the level

of activity can have a very big impact on costs.

9-5 An activity variance is the difference

between a revenue or cost item in the static

planning budget and the same item in the

flexible budget. An activity variance is due solely

to the difference in the level of activity assumed

in the planning budget and the actual level of

activity used in the flexible budget. Caution

should be exercised in interpreting an activity

variance. The “favorable” and “unfavorable”

labels are perhaps misleading for activity

variances that involve costs. A “favorable”

activity variance for a cost occurs because the

variance for a cost occurs because the cost has

some variable component and the actual level of

activity is greater than the planned level of

activity.

9-6 A revenue variance is the difference

between how much the revenue should have

been, given the actual level of activity, and the

activity. An unfavorable revenue variance occurs

because the revenue is less than expected for

the actual level of activity.

9-8 In a flexible budget performance report,

the static planning budget is not directly

compared to actual results. The flexible budget

is interposed between the static planning budget

and actual results. The differences between the

static planning budget and the flexible budget

are activity variances. The differences between

the flexible budget and the actual results are the

revenue and spending variances. The flexible

budget performance report cleanly separates the

differences between the static planning budget

and the actual results that are due to changes in

activity (the activity variances) from the

differences that are due to changes in prices and

the effectiveness with which resources are

managed (the revenue and spending variances).

9-10 When the static planning budget is

directly compared to actual results, it is implicitly

assumed that costs (and revenues) should not

change with a change in the level of activity.

This assumption is valid only for fixed costs.

However, it is unlikely that all costs are fixed.

Exercise 9-1 (10 minutes)

Gator Divers

Flexible Budget

For the Month Ended March 31

Actual diving-hours …………………………………

190

Revenue ($380.00q) ……………………………….

$72,200

Expenses:

Total expense ………………………………………..

Net operating income ………………………………

$22,085

Exercise 9-2 (10 minutes)

1. The activity variances are shown below:

Air Meals

Activity Variances

For the Month Ended December 31

Planning

Budget

Flexible

Budget

Activity

Variances

Meals ……………………………………

20,000

21,000

Revenue ($3.80q) ……………………

$76,000

$79,800

$3,800

F

Expenses:

46,000

48,300

U

11,400

11,650

U

Total expense …………………………

U

2. Management should note that the level of activity was above what had

been planned for the month. This led to an expected increase in profits

Exercise 9-3 (15 minutes)

Olympia Bivalve

Revenue and Spending Variances

For the Month Ended July 31

Flexible

Budget

Actual

Results

Revenue

and

Spending

Variances

Pounds …………………………………

7,000

Revenue ($4.20q) ……………………

$29,400

$28,600

$ 800

U

Expenses:

Packing supplies ($0.40q) ……….

2,800

2,970

170

U

Shipping ($0.75q) …………………

5,250

4,980

270

F

Utilities ($1,260) …………………..

1,260

1,070

190

F

U

Net operating income ………………

$ 8,190

$1,400

U

Exercise 9-4 (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

Revenue ($360.00q) …………………..

$18,000

$720

F

$18,720

$1,740

U

$16,980

Expenses:

U

168

U

450

Total expense …………………………...

U

Net operating income …………………

$374

F

$2,026

U

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.

Exercise 9-5 (15 minutes)

Icicle Bay Tours

Planning Budget

For the Month Ended August 31

Budgeted cruises (q1) ………………………………………………….

58

Budgeted passengers (q2) ……………………………………………

3,200

Expenses:

Net operating income ………………………………………………….

Exercise 9-6 (10 minutes)

The variance report compares the planning budget to actual results and

should

not

be used to evaluate how well costs were controlled during May.

The planning budget is based on 200 jobs, but the actual results are for

208 jobs. Consequently, the actual revenues and many of the actual costs

should

have been different from what was budgeted at the beginning of

the period. Direct comparisons of budgeted to actual costs are valid only if

the costs are fixed.

Exercise 9-7 (15 minutes)

The adjusted budget was created by multiplying each item in the budget

by the ratio 208/200; in other words, each item was adjusted upward by

4%. This procedure provides valid benchmarks for revenues and for costs

Exercise 9-8 (20 minutes)

Harold’s Roof Repair

Activity Variances

For the Month Ended June 30

Planning

Budget

Flexible

Budget

Activity

Variances

Repair-hours (q) ……………………..

2,500

2,400

Revenue ($43.50q) ………………….

$108,750

$104,400

$4,350

U

Expenses:

Wages and salaries

($21,380 + $15.80q) …………..

60,880

59,300

1,580

F

18,750

18,000

F

Equipment depreciation

($2,740 + $0.60q) ………………

F

Truck operating expenses

F

Administrative expenses

F

Net operating income ……………….

$1,700

U

Exercise 9-9 (15 minutes)

Auto Lavage

Planning Budget

For the Month Ended October 31

Budgeted cars washed (q) ………………………..

8,000

Revenue ($5.90q) …………………………………..

$47,200

Expenses:

Cleaning supplies ($0.70q) ……………………..

5,600

Electricity ($1,400 + $0.10q) ………………….

2,200

Wages and salaries ($4,700 + $0.40q) ……..

7,900

Depreciation ($8,300) …………………………...

8,300

Administrative expenses ($1,800 + $0.05q) .

Total expense ………………………………………..

Net operating income ………………………………

$16,500

Exercise 9-10 (15 minutes)

Auto Lavage

Flexible Budget

For the Month Ended October 31

Actual cars washed (q) …………………………....

8,100

Revenue ($5.90q) …………………………………..

$47,790

Expenses:

Cleaning supplies ($0.70q) ……………………..

5,670

Electricity ($1,400 + $0.10q) ………………….

2,210

Wages and salaries ($4,700 + $0.40q) ……..

7,940

Depreciation ($8,300) …………………………...

8,300

Administrative expenses ($1,800 + $0.05q) .

Total expense ………………………………………..

Net operating income ………………………………

$16,935

Exercise 9-11 (20 minutes)

Auto Lavage

Activity Variances

For the Month Ended October 31

Planning

Budget

Flexible

Budget

Activity

Variances

Cars washed (q) …………………………

8,000

8,100

Revenue ($5.90q) ……………………….

$47,200

$47,790

$590

F

Expenses:

Cleaning supplies ($0.70q) ………….

5,600

5,670

70

U

Maintenance ($0.30q)………………..

2,400

2,430

30

U

Depreciation ($8,300) ………………..

8,300

Rent ($2,100) ………………………….

2,100

U

Total expense …………………………….

U

Exercise 9-12 (20 minutes)

Auto Lavage

Revenue and Spending Variances

For the Month Ended October 31

Flexible

Budget

Actual

Results

Revenue

and

Spending

Variances

Cars washed (q) ……………………..

8,100

Revenue ($5.90q) ……………………

$47,790

$49,300

$1,510

F

Expenses:

Cleaning supplies ($0.70q) ………

5,670

6,100

430

U

Electricity ($1,400 + $0.10q) …..

2,210

2,170

F

U

7,940

8,260

320

U

Rent ($2,100) ………………………

2,100

2,300

200

U

F

Total expense …………………………

30,855

U

Net operating income ……………….

$16,935

$17,430

F

Exercise 9-13 (30 minutes)

Auto Lavage

Flexible Budget Performance Report

For the Month Ended October 31

Planning

Budget

Activity

Variances

Flexible

Budget

Revenue

and

Spending

Variances

Actual

Results

Cars washed (q) ……………………………..

8,000

8,100

Revenue ($5.90q) …………………………...

$47,200

$590

F

$47,790

$1,510

F

$49,300

Expenses:

Cleaning supplies ($0.70q) ………………

5,600

70

U

5,670

430

U

6,100

U

F

U

Depreciation ($8,300) …………………….

8,300

Rent ($2,100) ………………………………

2,100

200

U

2,300

5

U

F

Total expense …………………………………

U

30,855

U

31,870

Net operating income ……………………….

$16,500

$435

F

$16,935

F

$17,430

Exercise 9-14 (10 minutes)

Pierr Manufacturing Inc.

Planning Budget for Manufacturing Costs

For the Month Ended July 31

Budgeted machine-hours (q) ……..

4,000

Direct materials ($5.70q) …………..

$22,800

Supplies ($0.20q) ……………………

Utilities ($1,600 + $0.15q) ………..

2,200

Insurance ($11,400) ………………..

Total manufacturing cost …………..

$94,900

Exercise 9-15 (45 minutes)

1. The variance report should

not

be used to evaluate how well costs were

controlled. In August, the planning budget was based on 200 lessons,

but the actual results are for 210 jobs—an increase of 5% over budget.

2. See the following page.

3. The overall activity variance for net operating income was $670 F

(favorable). That means that as a consequence of the increase in

activity from 200 lessons to 210 lessons, the net operating income

should have been up $670 over budget. However, it wasn’t. The

budgeted net operating income was $6,880 and the actual net operating

income was $7,110, so the profit was up by only $230—not $670 as it

should have been. There are many reasons for this—as shown in the

Problem 9-15 (continued)

Wings Flight School

Flexible Budget Performance Report

For the Month Ended August 31

Planning

Budget

Activity

Variances

Flexible

Budget

Revenue

and

Spending

Variances

Actual

Results

Lessons (q) ……………………………….

200

210

Revenue ($225q) ………………………..

$45,000

$2,250

F

$47,250

$ 50

F

$47,300

Expenses:

Instructor wages($62q) ……………..

12,400

620

U

13,020

110

F

12,910

U

Fuel ($21q) ……………………………..

210

U

740

U

Maintenance ($670 + $13q) ………..

130

U

Administration ($4,210 + $1q) …….

U

80

F

Total expense …………………………….

U

Net operating income …………………..

F

$ 7,550

U

$ 7,110

Exercise 9-16 (45 minutes)

1. The planning budget based on 4 courses and 60 students appears

below:

Toque Cooking Academy

Planning Budget

For the Month Ended October 31

Budgeted courses (q1) ……………………………………….

4

Budgeted students (q2) ………………………………………

60

Revenue ($850q2) …………………………………………….

$51,000

Expenses:

Total expense ………………………………………………….

Net operating income ………………………………………..

2. The flexible budget based on 4 courses and 58 students appears below:

Toque Cooking Academy

Flexible Budget

For the Month Ended October 31

Actual courses (q1) ……………………………………………

4

Actual students (q2) …………………………………………..

58

Revenue ($850q2) …………………………………………….

$49,300

Expenses:

Total expense ………………………………………………….

Net operating income ………………………………………..

Exercise 9-16 (continued)

3. The flexible budget performance report for October appears below:

Toque Cooking Academy

Flexible Budget Performance Report

For the Month Ended October 31

Planning

Budget

Activity

Variances

Flexible

Budget

Revenue

and

Spending

Variances

Actual

Results

Courses (q1) …………………………...

4

Students (q2) …………………………..

60

58

Revenue ($850q2) …………………….

$51,000

$1,700

U

$49,300

$1,200

U

$48,100

Expenses:

F

U

F

560

F

Total expense ………………………….

634

F

260

F

Net operating income ………………..

U