Chapter 5 Flexible Budgets and Performance

Analysis
EXERCISE 5–1 Prepare a Flexible Budget [LO1]
EXERCISE 5–2 Prepare a Report Showing Activity Variances [LO2]
EXERCISE 5–3 Prepare a Report Showing Revenue and Spending Variances [LO3]
EXERCISE 5–4 Prepare a Flexible Budget Performance Report [LO4]
EXERCISE 5–5 Prepare a Flexible Budget with More Than One Cost Driver [LO5]
EXERCISE 5–6 Analyze a Performance Report [LO6]
EXERCISE 5–7 Critique a Variance Report [LO6]
EXERCISE 5–8 Flexible Budgets and Activity Variances [LO1, LO2]
EXERCISE 5–9 Flexible Budget [LO1]
EXERCISE 5–10 Flexible Budget [LO1]
EXERCISE 5–11 Prepare a Report Showing Activity Variances [LO2]
EXERCISE 5–12 Prepare a Report Showing Revenue and Spending Variances [LO3]
EXERCISE 5–13 Prepare a Flexible Budget Performance Report [LO4]
EXERCISE 5–14 Flexible Budget [LO1]
EXERCISE 5–15 Critique a Report; Prepare a Performance Report [LO1, LO4, LO6]
EXERCISE 5–16 Working with More Than One Cost Driver [LO4, LO5]
EXERCISE 5–17 Flexible Budgets and Revenue and Spending Variances [LO1, LO3]
EXERCISE 5–18 Flexible Budget Performance Report [LO1, LO4]
EXERCISE 5–19 Flexible Budget Performance Report in a Cost Center [LO1, LO4]
PROBLEM 5–20 Activity and Spending Variances [LO1, LO2, LO3]
PROBLEM 5–21 More Than One Cost Driver [LO4, LO5]
PROBLEM 5–22 Performance Report for a Nonprofit Organization [LO1, LO4, LO6]
 EXERCISE 5–1 Prepare a Flexible Budget [LO1]
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:

Gator Divers

Planning Budget

For the Month Ended March 31

Budgeted diving-hours (q)................................................................................ 200

Revenue ($380.00q)................................................................................... $76,000

Expenses:

Wages and salaries ($12,000 + $130.00q) ..........................................38,000

Supplies ($5.00q)...................................................................................1,000

Equipment rental ($2,500 + $26.00q) ...................................................7,700

Insurance ($4,200) .................................................................................4,200

Miscellaneous ($540 + $1.50q) ................................................................840

Total expense............................................................................................... 51,740

Net operating income .................................................................................$24,260

Required:

During March, the company’s activity was actually 190 diving-hours. Prepare a flexible
budget for that level of activity.

Solution:

Gator Divers
Flexible Budget
For the Month Ended March 31
Actual diving-hours (q) 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 5–2 Prepare a Report Showing Activity Variances [LO2]
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:

Air Meals

Planning Budget

For the Month Ended December 31

Budgeted meals (q)............................................................................................. 20,000

Revenue ($3.80q) .............................................................................................$76,000

Expenses:

Raw materials ($2.30q) ...............................................................................46,000

Wages and salaries ($6,400 + $0.25q) ........................................................11,400

Utilities ($2,100 + $0.05q) ............................................................................3,100

Facility rent ($3,800)......................................................................................3,800

Insurance ($2,600)......................................................................................... 2,600

Miscellaneous ($700 + $0.10q) .....................................................................2,700

Total expense...................................................................................................... 69,600

Net operating income ........................................................................................$ 6,400

 In December, 21,000 meals were actually served. The company’s flexible budget for this
level of activity is as follows:

Air Meals

Flexible Budget

For the Month Ended December 31

Budgeted meals (q) ...........................................................................................21,000

Revenue ($3.80q)............................................................................................ $79,800

Expenses:

Raw materials ($2.30q) ................................................................................48,300

Wages and salaries ($6,400 + $0.25q) .........................................................11,650

Utilities ($2,100 + $0.05q) ............................................................................3,150

Facility rent ($3,800) .....................................................................................3,800

Insurance ($2,600) .........................................................................................2,600

Miscellaneous ($700 + $0.10q) .....................................................................2,800

Total expense.................................................................................................... 72,300

Net operating income .......................................................................................$ 7,500

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.

Solution:

1.

Air Meals
Activity Variances
For the Month Ended December 31
Planning budget Flexible budget Activity Variances
Budgeted meals (q) 20,000 21,000
Revenue ($3.80q) $76,000 $79,800 $3,800 (F)
Expenses
Raw materials ($2.30q) $46,000 $48,300 $2,300 (U)
Wages and salaries ($6,400 + $11,400 $11,650 $250 (U)
$0.25q)
Utilities ($2,100 + $0.05q) $3,100 $3,150 $50 (U)
Facility rent ($3,800) $3,800 $3,800 $0
Insurance ($2,600) $2,600 $2,600 $0
Miscellaneous ($700 + $0.10q) $2,700 $2,800 $100 (U)
Total expense $69,600 $72,300 $2,700 (U)
Net operating income $6,400 $7,500 $1,100 (F)
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 of $1,100. However, the individual
items on the report should not receive much management attention. The favorable
variance for revenue and the unfavorable variances for expenses are entirely caused by
the increase in activity.

EXERCISE 5–3 Prepare a Report Showing Revenue and Spending Variances [LO3]
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:

Olympia Bivalve

Flexible Budget

For the Month Ended July 31

Actual pounds (q) .................................................................................................7,000

Revenue ($4.20q)............................................................................................. $29,400

Expenses:
 Packing supplies ($0.40q) ...............................................................................2,800

Oyster bed maintenance ($3,600) ...................................................................3,600

Wages and salaries ($2,540 + $0.50q) ............................................................6,040

Shipping ($0.75q) ...........................................................................................5,250

Utilities ($1,260) .............................................................................................1,260

Other ($510 + $0.05q) ........................................................................................860

Total expense ......................................................................................................19,810

Net operating income ........................................................................................$ 9,590

The actual results for July appear below:

Olympia Bivalve

Income Statement

For the Month Ended July 31

Actual pounds.......................................................................................................7,000

Revenue........................................................................................................... $28,600

Expenses:

Packing supplies ........................................................................................... 2,970

Oyster bed maintenance..................................................................................3,460

Wages and salaries ........................................................................................6,450

Shipping......................................................................................................... 4,980

Utilities...........................................................................................................1,070

Other........................................................................................................................1,480

Total expense ........................................................................................................20,410

Net operating income ..........................................................................................$ 8,190

Required:

Prepare a report showing the company’s revenue and spending variances for July.
 Solution:

Olympia Bivalve
Revenue and spending variances
For the Month Ended July 31
Planing Activity Flexible Revenue and Actual
Budget Variances Budget Spending Results
(1) (2) – (1) (2) Variances (3)
(3) – (2)
Actual pounds (q) 7,000 7,000
Revenue ($4.20q) $29,400 $800 (U) $28,600
Expenses:
Packing supplies ($0.40q) $2,800 $170 (U) $2,970
Oyster bed maintenance $3,600 $140 (F) $3,460
($3,600)
Wages and salaries ($2,540 $6,040 $410 (U) $6,450
+ $0.50q)
Shipping ($0.75q) $5,250 $270 (F) $4,980
Utilities ($1,260) $1,260 $190 (F) $1,070
Other ($510 + $0.05q) $860 $620 (U) $1,480
Total expense $19,810 $600 (U) $20,410
Net operating income $9,590 $1,400 (U) $8,190
EXERCISE 5–4 Prepare a Flexible Budget Performance Report [LO4]
Mt. Hood Air offers scenic overflights of Mt. Hood and the Columbia River gorge. Data
concerning the company’s operations in August appear below:

Mt. Hood Air

Operating Data

For the Month Ended August 31

Planning Flexible Actual

Budget Budget Results

 Flights (q) ...............................................................50 52 52

Revenue ($360.00q) ................................... $18,000 $18,720 $16,980

Expenses:

Wages and salaries ($3,800 + $92.00q)........... 8,400 8,584 8,540

Fuel ($34.00q) ..................................................1,700 1,768 1,930

Airport fees ($870 + $35.00q) .........................2,620 2,690 2,690

Aircraft depreciation ($11.00q) . ........................550 572 572

Office expenses ($230 + $1.00q) ........................280 282 450

Total expense .................................................13,550 13,896 14,182

Net operating income ....................................$ 4,450 $ 4,824 $ 2,798

The company measures its activity in terms of flights. Customers can buy individual
tickets for overflights or hire an entire plane for an overflight 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.

Solution:

1.

Mt. Hood Air

Flexible budget performance
For the Month Ended August 31
Planing Activity Flexible Revenue and Actual
Budget Variances Budget Spending Results
(1) (2) – (1) (2) Variances (3)
(3) – (2)
Flight (q) 50 52 52
Revenue ($360.00q) $18,000 $720 (F) $18,720 $1,740 (U) $16,980
Expenses:
Wages and salaries ($3,800 $8,400 $184 (U) $8,584 $44 (F) $8,540
 + $92.00q)
Fuel ($34.00q) $1,700 $68 (U) $1,768 $162 (U) $1,930
Airport fees ($870 + $2,620 $70 (U) $2,690 $0 $2,690
$35.00q)
Aircraft depreciation $550 $22 (U) $572 $0 $572
($11.00q)
Office expenses ($230 + $280 $2 (U) $282 $168 (U) $450
$1.00q)
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.

EXERCISE 5–5 Prepare a Flexible Budget with More Than One Cost Driver [LO5]
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:

Fixed Cost Cost per Cost per

per Month Cruise Passenger

Vessel operating costs .................................$6,800 $475.00 $3.50

Advertising ..................................................$2,700

Administrative costs ....................................$5,800 $36.00 $1.80

Insurance .....................................................$3,600
 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.

Solution:

Icicle Bay Tours

Planning Budget
For August
Budgeted cruises (q1) 58
Budgeted passengers (q2) 3,200
Revenue ($28.00q2) $89,600
Expenses
Vessel operating costs ($6,800 + $475.00q1 + $3.50q2) $45,550
Advertising ($2,700) $2,700
Administrative cost ($5,800 + $36.00q1 + $1.80q2) $13,648
Insurance ($3,600) $3,600
Total expense $65,498
Net operating income $24,102
EXERCISE 5–6 Analyze a Performance Report [LO6]
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 jobs, but the actual number of jobs
turned out to be 208. A report comparing the budgeted revenues and costs to the actual
revenues and costs appears below:

The Exterminator Inc.

Variance Report

For the Month Ended May 31

Planning Actual

Budget Results Variances

 Jobs ......................................................................200 208

Revenue .......................................................$37,000 $36,400 $600 U

Expenses:

Mobile team operating costs .....................16,900 17,060 160 U

Exterminating supplies ...............................4,000 4,350 350 U

Advertising ....................................................900 1,040 140 U

Dispatching costs ........................................2,700 2,340 360 F

Office rent...................................................2,300 2,300 0

Insurance ....................................................3,600 3,600 0

Total expense .................................................30,400 30,690 290 U

Net operating income ....................................$ 6,600 $ 5,710 $890 U

Required:

Is the above variance report useful for evaluating how well revenues and costs were
controlled during May? Why or why not?

Solution:

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.

To evaluate how well revenues and costs were controlled, it is necessary to estimate what
the revenues and costs should have been for the actual level of activity using a flexible
budget. The flexible budget amounts can then be compared to the actual results to
evaluate how well revenues and costs were controlled.
EXERCISE 5–7 Critique a Variance Report [LO6]
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 by 4%. A report comparing the
budgeted revenues and costs, with this adjustment, to the actual revenues and costs
appears below:

The Exterminator Inc.

Variance Report

For the Month Ended May 31

Adjusted Actual

Planning Budget Results Variances

Jobs ......................................................................208 208

Revenue ........................................................$38,480 $36,400 $2,080 U

Expenses:

Mobile team operating costs .....................17,576 17,060 516 F

Exterminating supplies ................................4,160 4,350 190 U

Advertising..................................................... 936 1,040 104 U

Dispatching costs ........................................2,808 2,340 468 F

Office rent ...................................................2,392 2,300 92 F

Insurance .....................................................3,744 3,600 144 F

Total expense .................................................31,616 30,690 926 F

Net operating income ...................................$ 6,864 $ 5,710 $ 1,154 U

Required:
Is the above variance report useful for evaluating how well revenues and costs were
controlled during May? Why or why not?

Solution:

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 that are strictly variable, but overstates
what fixed and mixed costs should be. Fixed costs, for example, should not increase at all
if the activity level increases by 4% - providing, of course, that this level of activity is
within the relevant range. Mixed costs should increase less than 4%.

To evaluate how well revenues and costs were controlled, it is necessary to estimate what
the revenues and costs should have been for the actual level of activity using a flexible
budget that explicitly recognizes fixed and mixed costs. The flexible budget amounts can
then be compared to the actual results to evaluate how well revenues and costs were
controlled.

EXERCISE 5–8 Flexible Budgets and Activity Variances [LO1, LO2]

Harold’s Roof Repair has provided the following data concerning its costs:

Fixed Cost per Month Cost per Repair-Hour

Wages and salaries ...................................................$21,380 $15.80

Parts and supplies................................................................... $7.50

Equipment depreciation .............................................$2,740 $0.60

Truck operating expenses...........................................$5,820 $1.90

Rent .............................................................................$4,650

Administrative expenses.............................................$3,870 $0.70

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.

Solution:

Harold’s Roof Repair

Activity Variances
For the Month Ended June 30
Planning budget Activity variance Flexible budget
(1) (2) – (1) (2)
Budgeted repair-hours (q) 2,500 2,400
Revenue ($43.50q) $108,750 $4,350 (U) $104,400
Expenses
Wages and salaries ($21,380 + $15.80q) $60,880 $1,580 (F) $59,300
Parts and supplies ($7.50q) $18,750 $750 (F) $18,000
Equipment depreciation ($2,740 + $4,240 $60 (F) $4,180
$0.60q)
Truck operating expenses ($5,820 + $10,570 $190 (F) $10,380
$1.90q)
Rent ($4,650) $4,650 $4,650
Administrative expenses ($3,870 + $5,620 $70 (F) $5,550
$0.70q)
Total expenses $104,710 $2,650 (F) $102,060
Net operating income $4,040 $1,700 (U) $2,340

EXERCISE 5–9 Flexible Budget [LO1]

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:
 Fixed Cost per Month Cost per Car Washed

Cleaning supplies .......................................................... $0.70

Electricity ..........................................................$1,400 $0.10

Maintenance................................................................... $0.30

Wages and salaries..............................................$4,700 $0.40

Depreciation .......................................................$8,300

Rent ....................................................................$2,100

Administrative expenses ....................................$1,800 $0.05

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.

Solution:

Auto Lavage
Planning Budget
For the Month Ended October 31
Budgeted car (q) 8,000
Revenue ($5.90q) $47,200
Expenses
Cleaning supplies ($0.70q) $5,600
Electricity ($1,400 + $0.10q) $2,200
Maintenance ($0.30q) $2,400
Wages and salaries ($4,700 + $0.40q) $7,900
Depreciation ($8,300) $8,300
Rent ($2,100) $2,100
Administrative expenses ($1,800 + $0.05q) $2,200
 Total expenses $30,700
Net operating income $16,500

EXERCISE 5–10 Flexible Budget [LO1]

Refer to the data for Auto Lavage in Exercise 9–9 . The company actually washed 8,100
cars in October.

Required:

Prepare the company’s flexible budget for October.

Solution:

Auto Lavage
Flexible Budget
For the Month Ended October 31
Budgeted car (q) 8,100
Revenue ($5.90q) $47,790
Expenses
Cleaning supplies ($0.70q) $5,670
Electricity ($1,400 + $0.10q) $2,210
Maintenance ($0.30q) $2,430
Wages and salaries ($4,700 + $0.40q) $7,940
Depreciation ($8,300) $8,300
Rent ($2,100) $2,100
Administrative expenses ($1,800 + $0.05q) $2,205
Total expenses $30,855
Net operating income $16,935

EXERCISE 5–11 Prepare a Report Showing Activity Variances [LO2]

Refer to the data for Auto Lavage in Exercise 9–9 . The actual operating results for
October appear below:
 Auto Lavage

Income Statement

For the Month Ended October 31

Actual cars washed ...........................................................................................8,100

Revenue........................................................................................................ $49,300

Expenses:

Cleaning supplies.........................................................................................6,100

Electricity.................................................................................................... 2,170

Maintenance. ...............................................................................................2,640

Wages and salaries.......................................................................................8,260

Depreciation. ...............................................................................................8,300

Rent............................................................................................................. 2,300

Administrative expenses .............................................................................2,100

Total expense .................................................................................................31,870

Net operating income.................................................................................... $17,430

Required:

Prepare a report showing the company’s activity variances for October.

Solution:

Auto Lavage
Activity Variances
For the Month Ended October 31
Planning budget Activity variance Flexible budget
(1) (2) – (1) (2)
Budgeted car (q) 8,000 8,100
Revenue ($5.90q) $47,200 $590 (F) $47,790
Expenses
Cleaning supplies ($0.70q) $5,600 $70 (U) $5,670
Electricity ($1,400 + $0.10q) $2,200 $10 (U) $2,210
Maintenance ($0.30q) $2,400 $30 (U) $2,430
Wages and salaries ($4,700 + $0.40q) $7,900 $40 (U) $7,940
Depreciation ($8,300) $8,300 $8,300
Rent ($2,100) $2,100 $2,100
Administrative expenses ($1,800 + $2,200 $5 (U) $2,205
$0.05q)
Total expenses $30,700 $155 (U) $30,855
Net operating income $16,500 $435 (F) $16,935

EXERCISE 5–12 Prepare a Report Showing Revenue and Spending Variances

[LO3]
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.

Solution:

Auto Lavage
Revenue and Spending Variances
For the Month Ended October 31
Flexible budget Revenue and Actual results
Spending
(2) (3)
Variances
(3) – (2)
Budgeted car (q) 8,100 8,100
Revenue ($5.90q) $47,790 $1,510 (F) $49,300
Expenses
Cleaning supplies ($0.70q) $5,670 $430 (U) $6,100
Electricity ($1,400 + $0.10q) $2,210 $40 (F) $2,170
 Maintenance ($0.30q) $2,430 $210 (U) $2,640
Wages and salaries ($4,700 + $0.40q) $7,940 $320 (U) $8,260
Depreciation ($8,300) $8,300 $8,300
Rent ($2,100) $2,100 $200 (U) $2,300
Administrative expenses ($1,800 + $2,205 $105 (F) $2,100
$0.05q)
Total expenses $30,855 $1,015 (U) $31,870
Net operating income $16,935 $495 (F) $17,430

EXERCISE 5–13 Prepare a Flexible Budget Performance Report [LO4]

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.

Solution:

Auto Lavage
Flexible budget performance
For the Month Ended October 31
Planing Activity Flexible Revenue and Actual
Budget Variances Budget Spending Results
(1) (2) – (1) (2) Variances (3)
(3) – (2)
Budgeted car (q) 8,000 8,100 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
Electricity ($1,400 + $2,200 $10 (U) $2,210 $40 (F) $2,170
$0.10q)
Maintenance ($0.30q) $2,400 $30 (U) $2,430 $210 (U) $2,640
Wages and salaries ($4,700 $7,900 $40 (U) $7,940 $320 (U) $8,260
 + $0.40q)
Depreciation ($8,300) $8,300 $8,300 $8,300
Rent ($2,100) $2,100 $2,100 $200 (U) $2,300
Administrative expenses $2,200 $5 (U) $2,205 $105 (F) $2,100
($1,800 + $0.05q)
Total expenses $30,700 $155 (U) $30,855 $1,015 (U) $31,870
Net operating income $16,500 $435 (F) $16,935 $495 (F) $17,430

EXERCISE 5–14 Flexible Budget [LO1]

Pierr Manufacturing Inc. has provided the following information concerning its
manufacturing costs:

Fixed Cost Cost per

per Month Machine-Hour

Direct materials ......................................................... $5.70

Direct labor ...................................................$42,800

Supplies...................................................................... $0.20

Utilities ..........................................................$1,600 $0.15

Depreciation ................................................$14,900

Insurance ......................................................$11,400

For example, utilities should be $1,600 per month plus $0.15 per machine-hour. The
company expects to work 4,000 machine-hours in July. Note that the company’s direct
labor is a fixed cost.

Required:

Prepare the company’s planning budget for manufacturing costs for July.

Solution:

Pierr Manufacturing Inc

Planning Budget for Manufacturing cost
For the Month Ended July 31
Budgeted machine-hours (q) 4,000
Manufacturing costs
Direct materials ($5.70q) $22,800
Direct labor ($42,800) $42,800
Supplies ($0.20q) $800
Utilities ($1,600 + $0.15q) $2,200
Depreciation ($14,900) $14,900
Insurance ($11,400) $11,400
Total cost $94,900

EXERCISE 5–15 Critique a Report; Prepare a Performance Report [LO1, LO4,

LO6]
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 report that compares the planning budget to actual results. A recent variance
report appears below:

Wings Flight School

Variance Report

For the Month Ended August 31

Planning Actual

Budget Results Variances

 Lessons.................................................................... 200 210

Revenue .........................................................$45,000 $47,300 $2,300 F

Expenses:

Instructor wages...........................................12,400 12,910 510 U

Aircraft depreciation ...................................11,400 11,970 570 U

Fuel ................................................................4,200 5,150 950 U

Maintenance...................................................3,270 3,470 200 U

Ground facility expenses ...............................2,440 2,350 90 F

Administration ...............................................4,410 4,340 70 F

Total expense ....................................................38,120 40,190 2,070 U

Net operating income .......................................$ 6,880 $ 7,110 $ 230 F

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 lessons sold:
 Revenue ........................................................................................................$225q

Instructor wages.............................................................................................. $62q

Aircraft depreciation....................................................................................... $57q

Fuel..................................................................................................................$21q

Maintenance ........................................................................................$670 + $13q

Ground facility expenses ...................................................................$1,640 + $4q

Administration....................................................................................$4,210 + $1q

Required:

1. Should the owner feel frustrated with the variance reports? Explain.

2. Prepare a flexible budget performance report for the school for August.

3. Evaluate the school’s performance for August.

Solution:

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. Consequently, the actual revenues and many of the
actual costs should have been different from what was budgeted at the beginning of the
period. For example, instructor wages, a variable cost, should have increased by 5%
because of the increase in activity, but the variance report assumes that they should not
have increased at all. This results in a spurious unfavorable variance for instructor
wages. Direct comparisons of budgeted to actual costs are valid only if the costs are
fixed.

2.

Wings Flight School

Flexible budget performance
For the Month Ended August 31
 Planing Activity Flexible Revenue and Actual
Budget Variances Budget Spending Results
(1) (2) – (1) (2) Variances (3)
(3) – (2)
Lessons (q) 200 210 210
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
Aircraft depreciation ($57q) $11,400 $570 (U) $11,970 $11,970
Fuel ($21q) $4,200 $210 (U) $4,410 $740 (U) $5,150
Maintenance ($670 + $13q) $3,270 $130 (U) $3,400 $70 (U) $3,470
Ground facility expenses $2,440 $40 (U) $2,480 $130 (F) $2,350
($1,640 + $4q)
Administration ($4,210 + $4,410 $10 (U) $4,420 $80 (F) $4,340
$1q)
Total expenses $38,120 $1,580 (U) $39,700 $490 (F) $40,190
Net operating income $6,880 $670 (F) $7,550 $440 (U) $7,110
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 revenue and spending variances. Perhaps most
importantly, fuel costs were much higher than expected. The spending variance for fuel
was $740 U (unfavorable) and may have been due to an increase in the price of fuel that
is beyond the owner/manager’s control. Most of the other revenue spending variances
were favorable or small, so with the exception of this item, costs seem to have been
adequately controlled.
EXERCISE 5–16 Working with More Than One Cost Driver [LO4, LO5]
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:

Fixed Cost Cost per Cost per

per month Course Student

Instructor wages ............................................... $2,980

Classroom supplies........................................... $310

Utilities ................................................$1,230 $85

Campus rent ..........................................$5,100

Insurance ...............................................$2,340

Administrative expenses.......................$3,940 $46 $7

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:

Actual

Revenue .................................................................................................$48,100

Instructor wages .....................................................................................$11,200

Classroom supplies.................................................................................$18,450

Utilities.....................................................................................................$1,980

Campus rent............................................................................................. $5,100

Insurance ..................................................................................................$2,480

Administrative expenses...........................................................................$3,970

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
company’s 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.

Solution:

1.

The Toque Cooking Academy

Planning Budget
For the Month Ended October 31
Number of students (q1) 60
Number of courses (q2) 4
Revenue ($850q1) $51,000
Expenses
Instructor wages ($2,980 q2) $11,920
Classroom supplies ($310q1) $18,600
Utilities ($1,230 + $85q2) $1,570
Campus rent ($5,100) $5,100
Insurance ($2,340) $2,340
Administrative expenses ($3,940 + $46q2 + $7q1) $4,544
Total expenses $44,074
Net operating income $6,926
2.

The Toque Cooking Academy

Flexible Budget
For the Month Ended October 31
Number of students (q1) 58
Number of courses (q2) 4
 Revenue ($850q1) $49,300
Expenses
Instructor wages ($2,980 q2) $11,920
Classroom supplies ($310q1) $17,980
Utilities ($1,230 + $85q2) $1,570
Campus rent ($5,100) $5,100
Insurance ($2,340) $2,340
Administrative expenses ($3,940 + $46q2 + $7q1) $4,530
Total expenses $43,440
Net operating income $5,860
3.

The Toque Cooking Academy

Flexible Budget Performance
For the Month Ended October 31
Planning Actvity Flexible Revenue and Actual Result
Budget Variances Budget Spending Variances (3)
(1) (2) – (1) (2) (3) – (2)
Number of students 60 58 58
(q1)
Number of courses (q2) 4 4 4
Revenue ($850q1) $51,000 $1,700 (U) $49,300 $1,200 (F) $48,100
Expenses
Instructor wages $11,920 $11,920 $720 (F) $11,200
($2,980 q2)
Classroom supplies $18,600 $620 (F) $17,980 $470 (U) $18,450
($310q1)
Utilities ($1,230 + $1,570 $1,570 $410 (U) $1,980
$85q2)
Campus rent ($5,100) $5,100 $5,100 $5,100
Insurance ($2,340) $2,340 $2,340 $140 (U) $2,480
Administrative $4,544 $14 (F) $4,530 $560 (F) $3,970
expenses ($3,940 +
$46q2 + $7q1)
Total expenses $44,074 $634 (F) $43,440 $260 (F) $43,180
Net operating income $6,926 $1,066 (U) $5,860 $940 (U) $4,920

EXERCISE 5–17 Flexible Budgets and Revenue and Spending Variances [LO1,
LO3]
Gelato Supremo is a popular neighborhood gelato shop. The company has provided the
following data concerning its operations:
 Fixed Variable Actual

Element Element Total for

per Month per Liter July

Revenue...................................................................... $13.50 $69,420

Raw materials ........................................................... $5.10 $26,890

Wages ........................................................... $4,800 $1.20 $11,200

Utilities ..........................................................$1,860 $0.15 $2,470

Rent ................................................................$3,150 $3,150

Insurance .........................................................$1,890 $1,890

Miscellaneous ..................................................$540 $0.15 $1,390

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.

Solution:

Gelato Supremo
Flexible Budget Performance
For the Month Ended July 31
Flexible Revenue and Spending Actual Result
Budget Variances (3)
(2) (3) – (2)
Expected liters sold (q) 4,900 4,900
Revenue ($13.50q) $66,150 $3,270 (F) $69,420
Expenses
Raw materials ($5.10q) $24,990 $1,900 (U) $26,890
 Wages ($4,800 + $1.20q) $10,680 $520 (U) $11,200
Utilities ($1,860 + $0.15q) $2,595 $125 (F) $2,470
Rent ($3,150) $3,150 $3,150
Insurance ($1,890) $1,890 $1,890
Miscellaneous ($540 + $0.15q) $1,275 $115 (U) $1,390
Total expenses $44,580 $2,410 (U) $46,990
Net operating income $21,570 $860 (F) $22,430

EXERCISE 5–18 Flexible Budget Performance Report [LO1, LO4]

Air Assurance Corporation provides on-site air quality testing services. The company has
provided the following data concerning its operations:
 Fixed Variable Actual

Component Component Total for

per Month per Job March

Revenue . . . . . . . . . . . . . . . . . . . . . . . .............................. $275 $24,750

Technician wages . . . . . . . . . . . . . . . . .................$8,600 $8,450

Mobile lab operating expenses . . . . . . .................$4,900 $29 $7,960

Office expenses . . . . . . . . . . . . . . . . . ...................$2,700 $3 $2,850

Advertising expenses . . . . . . . . . . . . . ..................$1,580 $1,650

Insurance . . . . . . . . . . . . . . . . . . . . . . ...................$2,870 $2,870

Miscellaneous expenses . . . . . . . . . . .......................$960 $2 $465

The company uses the number of jobs as its measure of activity. For example, 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 AirAssurance Corporation’s

activity variances and revenue and spending variances for March.

Solution:

Air Assurance Corporation

Flexible Budget Performance
For the Month Ended March 31
Planning Actvity Flexible Revenue and Actual Result
Budget Variances Budget Spending Variances (3)
(1) (2) – (1) (2) (3) – (2)
Expected jobs worked 100 98 98
(q)
Revenue ($275q) $27,500 $550 (U) $26,950 $2,200 (U) $24,750
Expenses
Technician wages $8,600 $8,600 $150 (F) $8,450
($8,600)
Mobile lab operating $7,800 $58 (U) $7,742 $218 (U) $7,960
expenses ($4,900 +
$29q)
Office expenses $3,000 $6 (F) $2,994 $144 (F) $2,850
($2,700 + $3q)
Advertising expenses $1,580 $1,580 $70 (U) $1,650
($1,580)
Insurance ($2,870) $2,870 $2,870 $2,870
Miscellaneous $1,160 $4 (F) $1,156 $691 (F) $465
expenses ($960 + $2q)
Total expenses $25,010 $68 (F) $24,942 $697 (F) $24,245
Net operating income $2,490 $482 (U) $2,008 $1,503 (U) $505

EXERCISE 5–19 Flexible Budget Performance Report in a Cost Center [LO1, LO4]
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 for the Production Department are based on the following
formulas, where q is the number of direct labor-hours worked in a month:

Direct labor . . . . . . . . . . . . . . . . . . . . . ..............................................................$16.30q

Indirect labor. . . . . . . . . . . . . . . . . . . . .................................................$4,300 + $1.80q

Utilities . . . . . . . . . . . . . . . . . . . . . . . . .................................................$5,600 + $0.70q

Supplies . . . . . . . . . . . . . . . . . . . . . . ................................................... $1,400 + $0.30q

Equipment depreciation . . . . . . . . . . ................................................ $18,600 + $2.80q

Factory rent . . . . . . . . . . . . . . . . . . . .................................................................. $8,300

 Property taxes. . . . . . . . . . . . . . . . . . .................................................................. $2,800

Factory administration . . . . . . . . . . . ................................................ $13,400 + $0.90q

The actual costs incurred in November in the Production Department are listed below:

Actual Cost Incurred

in November

Direct labor ....................................................................................$63,520

Indirect labor...................................................................................$10,680

Utilities .............................................................................................$8,790

Supplies ............................................................................................$2,810

Equipment depreciation..................................................................$29,240

Factory rent ......................................................................................$8,700

Property taxes ................................................................................. $2,800

Factory administration....................................................................$16,230

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
Department’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.

Solution:

1.
 The Production Department
Planning Budget
For the Month Ended November 30
Number of direct labor-hours (q) 4,000
Expenses
Direct labor ($16.30q) $65,200
Indirect labor ($4,300 + $1.80q) $11,500
Utilities ($5,600 + $0.70q) $8,400
Supplies ($1,400 + $0.30q) $2,600
Equipment depreciation ($18,600 + $2.80q) $29,800
Factory rent ($8,300) $8,300
Property taxes ($2,800) $2,800
Factory administration ($13,400 + $0.90q) $17,000
Total expenses $145,600
2.

The Production Department

Flexible Budget
For the Month Ended November 30
Number of direct labor-hours (q) 3,800
Expenses
Direct labor ($16.30q) $61,940
Indirect labor ($4,300 + $1.80q) $11,140
Utilities ($5,600 + $0.70q) $8,260
Supplies ($1,400 + $0.30q) $2,540
Equipment depreciation ($18,600 + $2.80q) $29,240
Factory rent ($8,300) $8,300
Property taxes ($2,800) $2,800
Factory administration ($13,400 + $0.90q) $16,820
Total expenses $141,040
3.
 The Production Department
Flexible Budget Performance
For the Month Ended November 30
Planning Actvity Flexible Revenue and Actual Result
Budget Variances Budget Spending Variances (3)
(1) (2) – (1) (2) (3) – (2)
Number of direct labor- 4,000 3,800 3,800
hours (q)
Expenses
Direct labor ($16.30q) $65,200 $3,260 (F) $61,940 $1,580 (U) $63,520
Indirect labor ($4,300 $11,500 $360 (F) $11,140 $460 (F) $10,680
+ $1.80q)
Utilities ($5,600 + $8,400 $140 (F) $8,260 $530 (U) $8,790
$0.70q)
Supplies ($1,400 + $2,600 $60 (F) $2,540 $270 (U) $2,810
$0.30q)
Equipment $29,800 $560 (F) $29,240 $29,240
depreciation ($18,600
+ $2.80q)
Factory rent ($8,300) $8,300 $8,300 $400 (U) $8,700
Property taxes $2,800 $2,800 $2,800
($2,800)
Factory administration $17,000 $180 (F) $16,820 $590 (F) $16,230
($13,400 + $0.90q)
Total expenses $145,600 $4,560 (F) $141,040 $1,730 (U) $142,770
4.

The overall favorable activity variance of $4,560 occurred because the actual level of
activity was less than the budgeted level of activity. Because of this decreased level of
activity, some of the costs should have been lower than budgeted. Consequently, calling
this a favorable variance is a bit misleading. On the other hand, the overall unfavorable
spending variance of $1,730 may be of concern to management. Why did the unfavorable
—and favorable—variances occur? Even the relatively small unfavorable spending
variance for supplies of $270 should probably be investigated because, as a percentage
of what the cost should have been ($270/$2,540 = 10.7%), this variance is fairly large.

PROBLEM 5–20 Activity and Spending Variances [LO1, LO2, LO3]

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:

Actual Cost

Cost Formula in April

Utilities . . . . . . . . . . . . . . . . . $16,500 plus $0.15 per machine-hour $21,300

Maintenance . . . . . . . . . . . . . $38,600 plus $1.80 per machine-hour $68,400

Supplies . . . . . . . . . . . . . . . . $0.50 per machine-hour $9,800

Indirect labor. . . . . . . . . . . . . $94,300 plus $1.20 per machine-hour $119,200

Depreciation . . . . . . . . . . . . .$68,000 $69,700

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.

Solution:
 1.

Securi Door Corporation

Activity Variances
For the Month Ended April 30
Planning budget Activity variance Flexible budget
(1) (2) – (1) (2)
Budgeted machine-hours worked (q) 20,000 18,000
Expenses
Utilities ($16,500 + $0.15q) $19,500 $300 (F) $19,200
Maintenance ($38,600 + $1.80q) $74,600 $3,600 (F) $71,000
Supplies ($0.50q) $10,000 $1,000 (F) $9,000
Indirect labor ($94,300 + $1.20q) $118,300 $2,400 (F) $115,900
Depreciation ($68,000) $68,000 $68,000
Total expenses $290,400 $7,300 (F) $283,100
The activity variances are all favorable because the actual activity was less than the
planned activity and therefore all of the variable costs should be lower than planned in
the original budget.

2.

Securi Door Corporation

Revenue and Spending Variances
For the Month Ended April 30
Flexible budget Revenue and Actual results
Spending
(2) (3)
Variances
(3) – (2)
Budgeted machine-hours worked (q) 18,000 18,000
Expenses
Utilities ($16,500 + $0.15q) $19,200 $2,100 (U) $21,300
Maintenance ($38,600 + $1.80q) $71,000 $2,600 (F) $68,400
Supplies ($0.50q) $9,000 $800 (U) $9,800
 Indirect labor ($94,300 + $1.20q) $115,900 $3,300 (U) $119,200
Depreciation ($68,000) $68,000 $1,700 (U) $69,700
Total expenses $283,100 $5,300 (U) $288,400
An unfavorable spending variance means that the actual cost was greater than what the
cost should have been for the actual level of activity. A favorable spending variance
means that the actual cost was less than what the cost should have been for the actual
level of activity. While this makes intuitive sense, sometimes a favorable variance may
not be good. For example, the rather large favorable variance for maintenance might
have resulted from skimping on maintenance. Since these variances are all fairly large,
they should all probably be investigated.

PROBLEM 5–21 More Than One Cost Driver [LO4, LO5]

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:

Fixed Cost Cost per Cost per

per Month Pizza Delivery

Pizza ingredients . . . . . . . . . ........................................ $4.20

Kitchen staff . . . . . . . . . . . . . . ..........................$5,870

Utilities . . . . . . . . . . . . . . . . . .............................. $590 $0.10

Delivery person . . . . . . . . . . . ...................................... $2.90

Delivery vehicle . . . . . . . . . . .............................. $610 $1.30

Equipment depreciation . . . . . .............................$384

Rent . . . . . . . . . . . . . . . . . . . ............................ $1,790

Miscellaneous . . . . . . . . . . . . .............................$710 $0.05

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:

Actual Results

Pizzas. . . . . . . . . . . . . . . . . . . . ................................................................... 1,600

Deliveries . . . . . . . . . . . . . . . . . . ...................................................................180

Revenue . . . . . . . . . . . . . . . . . . .............................................................. $21,340

Pizza ingredients . . . . . . . . . . . . . .............................................................$6,850

Kitchen staff . . . . . . . . . . . . . . . . . ............................................................$5,810

Utilities . . . . . . . . . . . . . . . . . . . . ................................................................ $875

Delivery person. . . . . . . . . . . . . . .................................................................$522

Delivery vehicle . . . . . . . . . . . . . ................................................................ $982

Equipment depreciation. . . . . . . .................................................................. $384

Rent . . . . . . . . . . . . . . . . . . . . . . ............................................................ . $1,790

Miscellaneous . . . . . . . . . . . . . . .................................................................. $778

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.

Solution:
 1.

Verona Pizza
Flexible Budget Performance
For the Month Ended October 31
Planning Actvity Flexible Revenue and Actual Result
Budget Variances Budget Spending Variances (3)
(1) (2) – (1) (2) (3) – (2)
Number of Pizzas (q1) 1,500 1,600 1,600
Number of Deliveries 200 180 180
(q2)
Revenue ($13.00q1) $19,500 $1,300 (F) $20,800 $540 (F) $21,340
Expenses
Pizza $6,300 $420 (U) $6,720 $130 (U) $6,850
ingredients
($4.20q1)
Kitchen staff $5,870 $5,870 $60 (F) $5,810
($5,870)
Utilities ($590 $740 $10 (U) $750 $125 (U) $875
+ $0.10q1)
Delivery person $580 $58 (F) $522 $522
($2.90q2)
Delivery vehicle $870 $26 (F) $844 $138 (U) $982
($610 +
$1.30q2)
Equipment $384 $384 $384
depreciation
($384)
Rent ($1,790) $1,790 $1,790 $1,790
Miscellaneous $785 $5 (U) $790 $12 (F) $778
($710 +
 $0.05q1)
Total expenses $17,319 $351 (U) $17,670 $321 (U) $17,991
Net operating income $2,181 $949 (F) $3,130 $219 (F) $3,349
2.

Some of the activity variances are favorable and some are unfavorable. This occurs
because there are two cost drivers (i.e., measures of activity) and one is up and the other
is down. The actual number of pizzas delivered is greater than budgeted, so the activity
variance for revenue is favorable, but the activity variances for pizza ingredients,
utilities, and miscellaneous are unfavorable. In contrast, the actual number of deliveries
is less than budgeted, so the activity variances for the delivery person and the delivery
vehicle are favorable.

PROBLEM 5–22 Performance Report for a Nonprofit Organization [LO1, LO4,

LO6]
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 government depends on the blood bank’s
ability to demonstrate control over its costs.

KGV Blood Bank

Cost Control Report

For the Month Ended September 30

Planning Actual

Budget Results Variances

Liters of blood collected . . . . . . . . . ....................600 780

 Medical supplies. . . . . . . . . . . . . . . ...............$ 7,110 $ 9,252 $2,142 U

Lab tests. . . . . . . . . . . . . . . . . . . . . ..................8,610 10,782 2,172 U

Equipment depreciation . . . . . . . . . ..................1,900 2,100 200 U

Rent . . . . . . . . . . . . . . . . . . . . . . . . ...................1,500 1,500 0

Utilities . . . . . . . . . . . . . . . . . . . . . . ...................300 324 24 U

Administration. . . . . . . . . . . . . . . . . ..............14,310 14,575 265 U

Total expense . . . . . . . . . . . . . . . . .............. $33,730 $38,533 $4,803 U

The managing director of the blood bank was very unhappy with this report, claiming
that his costs 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 government;
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:

Liters of blood collected . . . . . . . . . ............................................................600 780

Medical supplies. . . . . . . . . . . . . . . ............................................................ $11.85q

Lab tests. . . . . . . . . . . . . . . . . . . . ............................................................ . $14.35q

Equipment depreciation . . . . . . . .............................................................. . . $1,900

Rent . . . . . . . . . . . . . . . . . . . . . . . .............................................................. . $1,500

Utilities . . . . . . . . . . . . . . . . . . . . ................................................................ . . $300

Administration. . . . . . . . . . . . . . . . ........................................... . $13,200 + $1.85q

Required:

1. 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?
 Solution:

1.

KGV Blood Bank

Flexible Budget Performance
For the Month Ended September 30
Planning Actvity Flexible Revenue and Actual Result
Budget Variances Budget Spending Variances (3)
(1) (2) – (1) (2) (3) – (2)
Liters of blood 600 780 780
collected (q)
Expenses
Medical $7,110 $2,133 (U) $9,243 $9 (U) $9,252
supplies
($11.85q)
Lab tests $8,610 $2,583 (U) $11,193 $411 (F) $10,782
($14.35q)
Equipment $1,900 $1,900 $200 (U) $2,100
depreciation
($1,900)
Rent ($1,500) $1,500 $1,500 $1,500
Utilities ($300) $300 $300 $24 (U) $324
Administration $14,310 $333 (U) $14,643 $68 (F) $14,575
($13,200 +
$1.85q)
Total expenses $33,730 $5,049 (U) $38,779 $246 (F) $38,533
2.

The overall unfavorable activity variance of $5,049 was caused by the 30% increase in
activity. There is no reason to investigate this particular variance. The overall spending
variance is $246 F, which would seem to indicate that costs were well-controlled.
However, the favorable $411 spending variance for lab tests is curious. The fact that this
variance is favorable indicates that less was spent on lab tests than should have been
spent according to the cost formula. Why? Did the blood bank get a substantial discount
on the lab tests? Did the blood bank skimp on lab tests? If so, was this wise? In addition,
the unfavorable spending variance of $200 for equipment depreciation requires some
explanation. Was more equipment obtained to collect the additional blood?