Question

Planning Budget

Lavage Rapide is a Canadian company that owns and operates a large automatic car wash facility near Montreal. The following table provides data concerning the company’s costs:

For example, electricity costs are $1,200 per month plus $0.15 per car washed. The company expects to wash 9,000 cars in August and to collect an average of $4.90 per car washed.

Required:

Using Exhibit 9–2 as your guide, prepare the company’s planning budget for August.

Exhibit 9–2 Planning Budget

Answer 1

Planning Budget:

Planning budget is known as a budget which is prepared before the period of activity begins and is valid only for the level of planned activity.

Static planning budget is not suitable for evaluation of how well costs are controlled. If there is a variance between the actual level of activity or actual costs it will be unreasonable to compare them with the planned level of activity until and unless they are changed with the level of activity.

If activity is higher actual costs will be higher because of rise in variable costs and if activity is lower actual costs will be lower because of fall in variable costs.

Following is Planning Budget:

Statement showing calculations:

In the above planning budget, cleaning supplies and maintenance are variable costs as it totally depends on number of cars are washed.

Electricity is semi variable cost as $1,200 per month is fixed in it and $0.15 is levied on per car washed which are its variable portion. Similarly Wages and Salaries is semi variable cost as $5,000 is fixed per month and $0.30 is levied on per car washed.

Depreciation & Rent are fixed costs. Total expense according to planning budget is.

Revenue according to planning budget is $44,100.Hence, Net Operating Income as a result of Revenue less Total Expense is.

Answer 2

Planning Budget:

Planning budget is known as a budget which is prepared before the period of activity begins and is valid only for the level of planned activity.

Static planning budget is not suitable for evaluation of how well costs are controlled. If there is a variance between the actual level of activity or actual costs it will be unreasonable to compare them with the planned level of activity until and unless they are changed with the level of activity.

If activity is higher actual costs will be higher because of rise in variable costs and if activity is lower actual costs will be lower because of fall in variable costs.

Following is Planning Budget:

Statement showing calculations:

In the above planning budget, cleaning supplies and maintenance are variable costs as it totally depends on number of cars are washed.

Electricity is semi variable cost as $1,200 per month is fixed in it and $0.15 is levied on per car washed which are its variable portion. Similarly Wages and Salaries is semi variable cost as $5,000 is fixed per month and $0.30 is levied on per car washed.

Depreciation & Rent are fixed costs. Total expense according to planning budget is.

Revenue according to planning budget is $44,100.Hence, Net Operating Income as a result of Revenue less Total Expense is.