Question

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:

	Fixed Cost per Month			Cost per Car Washed
Cleaning supplies				$	0.70
Electricity	$	1,200		$	0.09
Maintenance				$	0.20
Wages and salaries	$	4,600		$	0.30
Depreciation	$	8,200
Rent	$	2,100
Administrative expenses	$	1,500		$	0.01

For example, electricity costs are $1,200 per month plus $0.09 per car washed. The company expects to wash 8,000 cars in August and to collect an average of $6.20 per car washed.

The actual operating results for August appear below.

Lavage Rapide
Income Statement
For the Month Ended August 31
Actual cars washed		8,100
Revenue	$	51,700
Expenses:
Cleaning supplies		6,100
Electricity		1,890
Maintenance		1,840
Wages and salaries		7,360
Depreciation		8,200
Rent		2,300
Administrative expenses		1,480
Total expense		29,170
Net operating income	$	22,530

Required:

Prepare a flexible budget performance report that shows the company’s revenue and spending variances and activity variances for August. (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.)

	Lavage Rapide Flexible Budget Performance Report For the Month Ended August 31 Actual Results Flexible Budget Planning Budget Cars washed 8,100 Revenue $51,700 Expenses: Cleaning supplies 6,100 Electricity 1,890 Maintenance 1,840 Wages and salaries 7,360 Depreciation 8,200 Rent 2,300 Administrative expenses 1,480 Total expense 29,170 Net operating income $22,530

Answer 1

Answer

• Requirement

	Actual Result	Revenue & Spending Variance		Flexible Budget	Activity variance		Planning Static Budget
Cars washed	8,100			8,100			8,000
	[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]	[D = Difference between C & E]		[E= Fixed + (Var x Planned units)]
Revenues	$          51,700.00	$                  1,480.00	F	$                                   50,220.00	$                     620.00	F	$                                        49,600.00
Expenses:
Cleaning Supplies	$            6,100.00	$                     430.00	U	$                                     5,670.00	$                       70.00	U	$                                          5,600.00
Electricity	$            1,890.00	$                        39.00	F	$                                     1,929.00	$                         9.00	U	$                                          1,920.00
Maintenance	$            1,840.00	$                     220.00	U	$                                     1,620.00	$                       20.00	U	$                                          1,600.00
Wages & Salaries	$            7,360.00	$                     330.00	U	$                                     7,030.00	$                       30.00	U	$                                          7,000.00
Depreciation	$            8,200.00	$                               -	N	$                                     8,200.00	$                              -	None	$                                          8,200.00
Rent	$            2,300.00	$                     200.00	U	$                                     2,100.00	$                              -	None	$                                          2,100.00
Administrative expense	$            1,480.00	$                     101.00	F	$                                     1,581.00	$                         1.00	U	$                                          1,580.00
Total Expenses	$          29,170.00	$                  1,040.00	U	$                                   28,130.00	$                     130.00	U	$                                        28,000.00
Net Operating Income	$          22,530.00	$                     440.00	F	$                                   22,090.00	$                     490.00	F	$                                        21,600.00

• Workings

	WORKING COLUMNS
Cars washed
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Revenues		(	$                  6.20	x	8100 or 8000	)
Expenses:
Cleaning Supplies	$                      -	+(	$                  0.70	x	8100 or 8000	)
Electricity	$         1,200.00	+(	$                  0.09	x	8100 or 8000	)
Maintenance	$                      -	+(	$                  0.20	x	8100 or 8000	)
Wages & Salaries	$         4,600.00	+(	$                  0.30	x	8100 or 8000	)
Depreciation	$         8,200.00	+(	$                      -	x	8100 or 8000	)
Rent	$         2,100.00	+(	$                      -	x	8100 or 8000	)
Administrative expense	$         1,500.00	+(	$                  0.01	x	8100 or 8000	)
Total Expenses	$      17,600.00	+(	$                  1.30	x	8100 or 8000	)

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]

Answer 2

Planning   Budget
Expected No. of car wash	8,000
Revenue	49,600	(8000*6.2)
Expenses:
Cleaning Supplies	5,600	(8000*0.7)
Electricity	1,920	(8000*0.09) +1200
Maintenance	1,600	(8000*0.2)
Wages and Salary	7,000	(8000*0.3) +4600
Depreciation	8,200
Rent	2,100
Administrative Expense	1,580	(8000*0.01) +1500
Total Expense	28,000
Net Operating Income	21,600

Flexible   Budget
Expected No. of car wash	8,100
Revenue	50,220	(8100*6.2)
Expenses:
Cleaning Supplies	5,670	(8100*0.7)
Electricity	1,929	(8100*0.09) +1200
Maintenance	1,620	(8100*0.2)
Wages and Salary	7,030	(8100*0.3) +4600
Depreciation	8,200
Rent	2,100
Administrative Expense	1,581	(8100*0.01) +1500
Total Expense	28,130
Net Operating Income	22,090

Flexible Budget Performance Report
	Actual Results	Revenue and Spending Variance ***		Flexible Budget	Activity Variance ###		Planning Budget
Expected No. of car wash	8,100			8,100			8,000
Revenue	51,700	1,480	F	50,220	620	F	49,600
Expenses:
Cleaning Supplies	6,100	430	U	5,670	70	U	5,600
Electricity	1,890	39	F	1,929	9	U	1,920
Maintenance	1,840	220	U	1,620	20	U	1,600
Wages and Salary	7,360	330	U	7,030	30	U	7,000
Depreciation	8,200	-	None	8,200	-	None	8,200
Rent	2,300	200	U	2,100	-	None	2,100
Administrative Expense	1,480	101	F	1,581	1	U	1,580
Total Expense	29,170	1,040	U	28,130	130	U	28,000
Net Operating Income	22,530	440	F	22,090	490	F	21,600

***   Revenue and spending variance is the difference of actual and flexible   budget.

***If   actual revenue is more than flexible revenue, it’s a favourable variance and   vice-versa.

***If   actual cost is more than flexible budget cost, it’s a unfavourable variance   and vice-versa.

###   Activity variance is the difference of flexible and planning budget.

### If   planning revenue is more than flexible revenue, it’s a unfavourable variance   and vice-versa.

### If   planning cost is more than flexible budget cost, it’s a favourable variance   and vice-versa.