Question

Exercise 9-2 Activity Variances [LO9-2]

Flight Café prepares in-flight meals for airlines in its kitchen located next to a local airport. The company’s planning budget for July appears below:

Flight Café
Planning Budget
For the Month Ended July 31
Budgeted meals (q)		25,000
Revenue ($4.00q)	$	100,000
Expenses:
Raw materials ($1.80q)		45,000
Wages and salaries ($6,200 + $0.20q)		11,200
Utilities ($1,800 + $0.05q)		3,050
Facility rent ($3,600)		3,600
Insurance ($2,700)		2,700
Miscellaneous ($800 + $0.10q)		3,300
Total expense		68,850
Net operating income	$	31,150

In July, 26,000 meals were actually served. The company’s flexible budget for this level of activity appears below:

Flight Café
Flexible Budget
For the Month Ended July 31
Budgeted meals (q)		26,000
Revenue ($4.00q)	$	104,000
Expenses:
Raw materials ($1.80q)		46,800
Wages and salaries ($6,200+ $0.20q)		11,400
Utilities ($1,800 + $0.05q)		3,100
Facility rent ($3,600)		3,600
Insurance ($2,700)		2,700
Miscellaneous ($800 + $0.10q)		3,400
Total expense		71,000
Net operating income	$	33,000

Required:

1. Calculate the company’s activity variances for July. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Flight Café Activity Variances For the Month Ended July 31 Revenue Expenses: Raw materials Wages and salaries Utilities Facility rent Insurance Miscellaneous Total expense Net operating income

Answer 1

Ans.	FLIGHT   CAFÉ
	Activity Variances
	For the Month Ended July 31
		Flexible Budget	Activity variance		Planning Budget
	Meals	26,000			25,000
	Revenue	$104,000	$4,000	F	$100,000
	Expenses:
	Raw materials	$46,800	$1,800	U	$45,000
	Wages and salaries	$11,400	$200	U	$11,200
	Utilities	$3,100	$50	U	$3,050
	Facility rent	$3,600	$0	none	$3,600
	Insurance	$2,700	$0	none	$2,700
	Miscellaneous	$3,400	$100	U	$3,300
	Total expenses	$71,000	$2,150	U	$68,850
	Net operating income	$33,000	$1,850	F	$31,150
	*Flexible budget is prepared on the basis of actual units.
	*Fixed expenses remain same as planning budget.
	Activity variance =   Flexible budget - Planning budget
	*Increase in revenue or net operating income from planning budget to flexible budget   =   Favorable.
	*Decrease in revenue or net operating income from planning budget to flexible budget =   Unfavorable.
	*Increase in expenses from Planning budget to flexible budget =   Unfavorable.
	*Decrease in expenses from Planning budget to flexible budget =   Favorable.