Question

Flaming Foliage Sky Tours is a small sightseeing tour company in New Hampshire. The firm specializes in aerial tours of the New England countryside during September and October, when the fall color is at its peak. Until recently, the company had not had an accounting department. Routine bookkeeping tasks, such as billing, had been handled by an individual who had little formal training in accounting. As the business began to grow, however, the owner recognized the need for more formal accounting procedures. Jacqueline Frost has recently been hired as the new controller, and she will have the authority to hire an assistant.

During her first week on the job, Frost was given the following performance report. The report was prepared by Red Leif, the company’s manager of aircraft operations, who was planning to present it to the owner the next morning. “Look at these favorable variances for fuel and so forth,” Leif pointed out, as he showed the report to Frost. “My operations people are really doing a great job.” Later that day, Frost looked at the performance report more carefully. She immediately realized that it was improperly prepared and would be misleading to the company’s owner.

FLAMING FOLIAGE SKY TOURS Performance Report For the Month of September
	Formula Flexible Budget (per air mile)		Actual (34,000 air miles)		Static Budget (37,000 air miles)		Variance
Passenger revenue	$ 13.00		$	442,000	$	481,000	$	39,000	U
Less: Variable expenses:
Fuel	$	1.90	$	68,800	$	70,300	$	1,500	F
Aircraft maintenance		2.40		78,600		88,800		10,200	F
Flight crew salaries		1.30		45,200		48,100		2,900	F
Selling and administrative		3.00		100,600		111,000		10,400	F
Total variable expenses	$	8.60	$	293,200	$	318,200	$	25,000	F
Contribution margin	$	4.40	$	148,800	$	162,800	$	14,000	U
Less: Fixed expenses:	Per Month
Depreciation on aircraft	$	10,500	$	10,500	$	10,500	$	0
Landing fees		4,500		5,100		4,500		600	U
Supervisory salaries		42,000		39,800		42,000		2,200	F
Selling and administrative		51,000		57,000		51,000		6,000	U
Total fixed expenses	$	108,000	$	112,400	$	108,000	$	4,400	U
Operating income			$	36,400	$	54,800	$	18,400	U

Required:

1. Prepare a columnar flexible budget for Flaming Foliage Sky Tours’ expenses, using air miles as the cost driver at the following activity levels: 34,000 air miles, 37,000 air miles, and 40,000 air miles.

Required i Required 2 Required 4 Required 5 Prepare a columnar flexible budget for Flaming Foliage Sky Tours' expenses, using air miles as the cost driver at the following activity levels: 34,000 air miles, 37,000 air miles, and 40,000 air miles. Activity Level (Air Miles) 34,000 37,000 40,000 Variable expenses: Total variable expenses $ 0 $ 0 $ 0 Fixed expenses: Total fixed expenses $ 0 $ 0 $ Total expenses

2. In spite of several favorable expense variances shown on the report above, the company’s September operating income was only about two-thirds of the expected level. Identify some of the possible reasons.

4. Prepare a revised expense variance report for September, which is based on the flexible budget prepared in part (1).

5. Jacqueline Frost presented the revised expense report to Leif along with the memo explaining why the original performance report was misleading. Leif did not take it well. He complained of Frost’s “interference” and pointed out that the company had been doing just fine without her. “I’m taking my report to the owner tomorrow,” Leif insisted. “Yours just makes us look bad.” What are Frost’s ethical obligations in this matter?

Answer 1

1.

	Activity Level (Air Miles)
	34,000	37,000	40,000
Variable expenses:
Fuel	64600	70300	76000
Aircraft maintenance	81600	88800	96000
Flight crew salaries	44200	48100	52000
Selling and administrative	102000	111000	120000
Total variable expenses	292400	318200	344000
Fixed expenses:
Depreciation on aircraft	10500	10500	10500
Landing fees	4500	4500	4500
Supervisory salaries	42000	42000	42000
Selling and administrative	51000	51000	51000
Total fixed expenses	108000	108000	108000
Total expenses	400400	426200	452000

2.

The variance report is misleading because the activity levels used for the comparison differ.	X
There is a large unfavorable variance in passenger revenue.	X
Favorable expense variances have no impact on operating income.
There are unfavorable variances in fixed expenses.	X

4.

	Formula Flexible Budget (per air mile)	Actual (34,000 air miles)	Flexible Budget (34,000 air miles)	Variance
Variable expenses:
Fuel	$                     1.90	68800	64600	4200	Unfavorable
Aircraft maintenance	$                     2.40	78600	81600	3000	Favorable
Flight crew salaries	$                     1.30	45200	44200	1000	Unfavorable
Selling and administrative	$                     3.00	100600	102000	1400	Favorable
Total variable expenses	$                     8.60	293200	292400	800	Unfavorable
Fixed expenses:	Per Month
Depreciation on aircraft	10500	10500	10500	0	None
Landing fees	4500	5100	4500	600	Unfavorable
Supervisory salaries	42000	39800	42000	2200	Favorable
Selling and administrative	51000	57000	51000	6000	Unfavorable
Total fixed expenses	108000	112400	108000	4400	Unfavorable
Total expenses		405600	400400	5200	Unfavorable

5.

Frost should let Leif decide on the best course of action.
Frost should resign in protest.
Frost should show the owner her memo to Leif as well as the revised expense variance report.	X
Frost has an ethical obligation to make the owner aware that she believes Leif's analysis is faulty.	X