Question

Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below:

  

Exchange Corp Analysis of Revenues and Costs For the Month Ended May 31
	Actual Unit Revenues and Costs			Planning Budget Unit Revenues and Costs			Variances
Exchanges completed		30			25
Revenue	$	580		$	670		$	90	U
Expenses:
Legal and search fees		233			215			18	U
Office expenses		155			245			90	F
Equipment depreciation		25			30			5	F
Rent		75			90			15	F
Insurance		15			18			3	F
Total expense		503			598			95	F
Net operating income	$	77		$	72		$	5	F

  

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $245 per exchange completed on the planning budget; whereas, the average actual office expense is $155 per exchange completed.

Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depreciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $4,850.

All of the company’s revenues come from fees collected when an exchange is completed.

  

Required:
1.	Is the report prepared by the bookkeeper useful as a performance report?
	Yes No

  

2.	Complete a performance report that would help the owner/manager assess the performance of the company in May. (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.)

	Exchange Corp Flexible Budget Performance Report For the Month Ended May 31 Actual Results Revenue and Spending Variances Flexible Budget Activity Variances Planning Budget Exchanges completed Revenue Expenses: Legal and search fees Office expenses Equipment depreciation Rent Insurance Total expense Net operating income

     

Answer 1

1
NO, the report prepared by bookkeeper is not a useful performance report
2
	Actual results	Revenue and spending variances		Flexible budget	Activity variances		Planning budget
Exchanges completed	30			30			25
Revenue	17400	2700	U	20100	3350	F	16750
Expenses:
Legal and search fees	6990	540	U	6450	1075	U	5375
Office expenses	4650	1730	F	6380	255	U	6125
Equipment Depreciation	750	0	None	750	0	None	750
Rent	2250	0	None	2250	0	None	2250
Insurance	450	0	None	450	0	None	450
Total expense	15090	1190	F	16280	1330	U	14950
Net operating income	2310	1510	U	3820	2020	F	1800
Office expenses:
Variable component = (6125-4850)/25 = $51
Office expenses in flexible budget = 4850+(30*51) = $6380