Question

The Redmond Management Association held its annual public relations luncheon in April Year 2. Based on the previous year's results, the organization allocated $25,290 of its operating budget to cover the cost of the luncheon. To ensure that costs would be appropriately controlled, Molly Hubbard, the treasurer, prepared the following budget for the Year 2 luncheon. The budget for the luncheon was based on the following expectations: 1. The meal cost per person was expected to be $14.50. The cost driver for meals was attendance, which was expected to be 1,400 individuals. 2. Postage was based on $0.49 per invitation and 3,000 invitations were expected to be mailed. The cost driver for postage was number of invitations mailed. 3. The facility charge is $1,000 for a room that will accommodate up to 1,600 people; the charge for one to hold more than 1,600 Page 379 people is $1,500. 4. A fixed amount was designated for printing, decorations, the speaker's gift, and publicity. REDMOND MANAGEMENT ASSOCIATION Public Relations Luncheon Budget $25,290 20,300 1,470 April Year 2 Operating funds allocated Expenses Variable costs Meals (1,400 $14.50) Postage (3,000 * $0.49) Fixed costs Facility Printing Decorations Speaker's gift Publicity Total expenses Budget surplus (deficit) 1,000 950 840 130 600 25,290 $ 0

• 1. Prepare a flexible budget.
• 2. Compute the sales volume variance and the variable cost volume variances based on a comparison between the master budget and the flexible budget
• 3.Compute flexible budget variances by comparing the flexible budget with the actual results.
• 4.Summarize the results of the sales volume and variable cost volume variances computations based on the comparison between the master budget and the flexible budget.
• 5.Summarize the results of the flexible budget variances computations based on the comparison between the flexible budget and the actual results.
• 6.Justify the favorable or unfavorable budget variances.
• 7.Since this is a not-for-profit organization, address why anyone should be concerned with meeting the budget.
• 8.Make recommendations for what can be done differently to stay on budget for future luncheons. Provide specific examples to support your recommendations.

Answer 1

a.

	Master Budget	-	Flexible Budget	=	Volume Variance
Allocated funds	$25,290		$25,290		$0
Expenses:
Variable expenses
Meals	20,300		23,490 (1)		3,190  U
Postage	1,470		1,960 (2)		490  U
Fixed expenses
Facility	1,000		1,500 (3)		500  U
Printing	950		950		0
Decorations	840		840		0
Speaker's gift	130		130		0
Publicity	600		600		0
Total expenses	25,290		29,470		4,180  U
Surplus(deficit)	$         0		$ (4,180)		$ 4,180  U

(1)  1,620 x $14.50 = $23,490

(2)  4,000 x $0.49 = $1,960

(3)  Higher charge due to higher attendance

b.

	Flexible Budget	-	Actual Results	=	Flexible Variances
Allocated funds	$25,290		$25,290		$0
Expenses:
Variable costs:
Meals	23,490		25,110		1,620 U
Postage	1,960		1,960		0
Fixed costs:
Facility	1,500		1,500		0
Printing	950		950		0
Decorations	840		840		0
Speaker's gift	130		130		0
Publicity	600		600		0
Total expenses	29,470		31,090		1,620 U
Surplus (deficit)	$ (4,180)		$ (5,800)		$1,620 U

c.      The $4,810 ($25,110 -  $20,300) variance associated with meal cost is due to two factors.  As indicated by the volume variance computed in Requirement a, $3,190 of the variance was due to higher than expected attendance.  The higher attendance was caused by Mr. Snow's decision to increase the invitation list to include former members.  As indicated by the flexible budget variance computed in Requirement b only $1,620 of the total variance was due to adding the dessert thereby increasing meal cost. The increase in the invitation list and the resultant increase in attendance also caused postage and facility costs to be over budget.  In summary Mr. Snow is responsible for the $4,180 volume variance computed in Requirement a, while Ms. Hubbard is responsible for the $1,620 flexible budget variance computed in Requirement b. These two variances combined equal the total variance of $5,800.  Accordingly, Mr. Snow is responsible for a far greater portion of the total variance than is Ms. Hubbard.

d.      The members of the organization are certainly concerned with the control of costs. The costs incurred by the organization are ultimately related to the dues charged to members. Not-for-profit entities are responsible for the effective utilization of resources. Acco