Question

PROBLEM 9-22 Critique a Report; Prepare a Performance Report LO9-1, LO9-2, L09-3, LO9-4, LO9-6 TipTop 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: TipTop Flight School Variance Report For the Month Ended July 31 Actual Planning Budget Variances Results 150 155 Lessons $900 F $33.000 $33,900 Revenue Expenses: Instructor wages 120 U 9,750 5,700 2,250 2,330 9,870 190 U 5,890 2,750 2,450 Aircraft depreciation 500 U Fuel. 120 U Maintenance 10 F 1,550 Ground facility expenses 1,540 70 F 3,390 3,320 Administration 850 U 25,820 24,970 Total expense $ 8,080 $ 50 F $ 8,030 Net operating income 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 July, but the report shows an unfavorable variance. The planning budget was developed using the following formulas, where q is the number of lessons sold: Cost Formulas Revenue $220q $65q $38q Instructor wages Aircraft depreciation Fuel $15q $530+$12q $1,250 + $2q $3,240+$1q Maintenance Ground facility expenses Administration. Required: Should the owner feel frustrated with the variance reports? Explain. 1. Using Exhibit 9-8 as your guide, prepare a flexible budget performance report for the school. for July 3. 2 Evaluate the school's performance for July

Answer 1

1. Should the owner feel frustrated with the variance reports? Explain.
Yes,  the owner should  feel frustrated with the variance reports .The variance report should not be used to evaluate how well costs were controlled. In July, the planning budget was based on 150 lessons, but the actual results are for 155 lessons—an increase of more than 3% 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 more than 3% 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. Prepare a flexible budget performance report for the school for July.
	Variable component		Fixed component
Revenue	$220	q
Instructor wages	65	q					$220q
Aircraft depreciation	38	q					$65q
Fuel	15	q					$38q
Maintenance	12	q	$530				$15q
Ground Facility Exp.	2	q	$1,250				$530 + $12q
Administratration	1	q	$3,240				$1,250 + $2q
							$3,240 + $1q
TipTop Flight School
Flexible Budget Performance Report
For the Month Ended July 31
Planning Budgeting	Actual Results	Revenue and spending Variance		Flexible Budget	Activity Variance		Planning Budget
Lessons ...	155.00			155			150.00
Revenue ...	$33,900	$200	U	$34,100	$1,100	F	$33,000
Expenses:
Instructor wages ...	$9,870	$205	F	$10,075	$325	U	$9,750
Aircraft depreciation...	$5,890			$5,890	$190	U	$5,700
Fuel ...	$2,750	$425	U	$2,325	$75	U	$2,250
Maintenance ...	$2,450	$60	U	$2,390	$60	U	$2,330
Ground facility expenses...	$1,540	$20	F	$1,560	$10	U	$1,550
Administration ...	$3,320	$75	F	$3,395	$5	U	$3,390
Total expense ...	$25,820	$185	U	$25,635	$665	U	$24,970
Net operating income ...	$8,080	$385	U	$8,465	$435	F	$8,030
3)
The overall activity variance for net operating income was $435 F (favorable). That means that as a consequence of the increase in activity from 150 lessons to 155 lessons, the net operating income should have been up $435 over budget. However, it wasn’t. The budgeted net operating income was $8,030 and the actual net operating income was $8,080, so the profit was up by only $50—not $435 as it should have been. The fuel costs were much higher than expected. The spending variance for fuel was $425  (unfavorable) and may have been due to an increase in the price of fuel that is beyond the manager’s control. Most of the other spending variances were favorable, so with the exception of this item, costs seem to have been adequately controlled. In addition, the unfavorable revenue variance of $200 indicates that revenue was slightly less than they should have been

32 2. Prepare a flexible budget performance report for the school for July. 34 Fixed component Variable component 220 65 35 Revenue 36 Instructor wages 37 Aircraft depreciation 38 Fuel 39 Maintenance 40 Ground Facility Exp. 41 Administratration 530 1250 3240 $2200 $659 $389 $159 $530+ $129 $1,250 + $29 $3,240 + $10 43 TipTop Flight School 44 Flexible Budget Performance Report 45 For the Month Ended July 31 46 Planning Budgeting Actual Results Revenue and spending Variance Flexible Budget Activity Variance Planning Budget 47 155 33900 155 =B35$E$48 150 33000 =E49-349 =E49-H49 F =E51-B51 F 48 Lessons ... 49 Revenue ... 50 Expenses: 51 Instructor wages ... 52 Aircraft depreciation... 53 Fuel ... 54 Maintenance ... 55 Ground facility expenses... 56 Administration ... 57 Total expense... 58 Net operating income... 9870 5890 2750 2450 1540 3320 25820 8080 =B53-E53 =B54-E54 =E55-B55 =E56-856 =B57-E57 =E58-B58 =B36 $E$48 =B37*$E$48 =B38*$E$48 =(B39"$E$48)+D39 = (B40*$E$48)+D40 =(B41$E$48)+D41 =SUM(E51:56) =E49-E57 =E51-451 =E52-H52 =E53-H53 =E54-154 =E55-H55 =E56-H56 =E57-457 =E58-H58 9750 5700 2250 2330 1550 3390 24970 8030 F 59