Question

8.

AirQual Test Corporation provides on-site air quality testing services. The company has provided the following cost formulas and actual results for the month of February:

	Fixed Component per Month			Variable Component per Job			Actual Total for February
Revenue				$	277		$	33,260
Technician wages	$	8,600					$	8,450
Mobile lab operating expenses	$	4,900		$	31		$	8,770
Office expenses	$	2,400		$	3		$	2,640
Advertising expenses	$	1,550					$	1,620
Insurance	$	2,880					$	2,880
Miscellaneous expenses	$	930		$	1		$	365

The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses should be $4,900 plus $31 per job, and the actual mobile lab operating expenses for February were $8,770. The company expected to work 130 jobs in February, but actually worked 132 jobs.

Required:

Prepare a flexible budget performance report showing AirQual Test Corporation’s revenue and spending variances and activity variances for February. (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.)

Answer 1

• Requirement

	Actual Result	Revenue & Spending Variance		Flexible Budget	Activity variance		Planning Static Budget
Jobs	132			132			130
	[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]	[D = Difference between C & E]		[E= Fixed + (Var x Planned units)]
Revenues	$35,750	$814	U	$36,564	$554	F	$36,010
Expenses:
Technical wages	$8,150	$450	F	$8,600	$0	None	$8,600
Mobile lab operating expenses	$8,980	$12	F	$8,992	$62	U	$8,930
Office expenses	$2,330	$466	F	$2,796	$6	U	$2,790
Advertising expense	$1,650	$100	U	$1,550	$0	None	$1,550
Insurance	$2,880	$0	N	$2,880	$0	None	$2,880
Miscellaneous expense	$555	$507	F	$1,062	$2	U	$1,060
Total Expenses	$24,545	$1,335	F	$25,880	$70	U	$25,810
Net Operating Income	$11,205	$521	F	$10,684	$484	F	$10,200

• Working and concept

Conceptual notes:

#1: Flexible Budget data is based on 'budgeted rates' applied on 'actual level/output/units'

#2: Spending Variance = Difference between 'Actual data' and 'Flexible Budget data'

#3: Activity Variance = Difference between 'Flexible Budget data' and 'Static/Planned Budget data'.

* Favourable Variance in case of Revenues occurs when:

>Actual revenues are MORE than Flexible budget revenues [Spending Variance]

>Flexible budget revenues are MORE than Static/Planned budget revenues [Activity Variance]

* Unfavourable Variance in case of Revenues occurs when:

>Actual revenues are LESS than Flexible budget revenues [Spending Variance]

>Flexible budget revenues are LESS than Static/Planned budget revenues [Activity Variance]

* Favourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are LESS than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are LESS than Static/Planned budget expenses/costs [Activity Variance]

* Unfavourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are MORE than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are MORE than Static/Planned budget expenses/costs [Activity Variance]

	WORKING COLUMNS
Jobs
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Revenues		(	$             277.00	x	132 or 130	)
Expenses:
Technical wages	$8,600	+(	$                      -	x	132 or 130	)
Mobile lab operating expenses	$4,900	+(	$               31.00	x	132 or 130	)
Office expenses	$2,400	+(	$                  3.00	x	132 or 130	)
Advertising expense	$1,550	+(	$                      -	x	132 or 130	)
Insurance	$2,880	+(	$                      -	x	132 or 130	)
Miscellaneous expense	$930	+(	$                  1.00	x	132 or 130	)
Total Expenses	$21,260	+(	$               35.00	x	132 or 130	)
Net Operating Income