Question

Problem 9-24 Critiquing a Report; Preparing a Performance Budget [LO9-1, LO9-2, LO9-3, LO9-4, LO9-6]

Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below:

Exchange Corp. Analysis of Revenues and Costs For the Month Ended May 31
	Actual Unit Revenues and Costs			Planning Budget Unit Revenues and Costs			Variances
Exchanges completed		30			25
Revenue	$	650		$	750		$	100	U
Expenses:
Legal and search fees		281			255			26	U
Office expenses		235			269			34	F
Equipment depreciation		25			30			5	F
Rent		75			90			15	F
Insurance		15			18			3	F
Total expense		631			662			31	F
Net operating income	$	19		$	88		$	69	U

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $269 per exchange completed on the planning budget; whereas, the average actual office expense is $235 per exchange completed.

Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depreciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $5,250.

All of the company’s revenues come from fees collected when an exchange is completed.

Required:

1. Is the report prepared by the bookkeeper useful as a performance report?

2. Complete the performance report that would help the owner/manager assess the performance of the company in May.

Exchange Corp. Flexible Budget Performance Report For the Month Ended May 31 Actual Results Revenue and Spending Variances Flexible Budget Activity Variances Planning Budget Exchanges completed 30 30 25 Revenue $19,500 $3,000 U $22,500 $3,750 F $18,750 Expenses: Legal and search fees 8,430 780 U 7,650 1,275 U 6,375 Office expenses 7,050 ? U ? ? U 6,725 Equipment depreciation 750 0 None 750 0 None 750 Rent 2,250 0 None 2,250 0 None 2,250 Insurance 450 0 None 450 0 None 450 Total expense 18,930 ? U ? ? U 16,550 Net operating income $570 ? U ? ? F $2,200

Answer 1

1
NO, the report prepared by bookkeeper is not a useful performance report
2
	Actual results	Revenue and spending variances		Flexible budget	Activity variances		Planning budget
Exchanges completed	30			30			25
Revenue	19500	3000	U	22500	3750	F	18750
Expenses:
Legal and search fees	8430	780	U	7650	1275	U	6375
Office expenses	7050	30	U	7020	295	U	6725
Equipment Depreciation	750	0	None	750	0	None	750
Rent	2250	0	None	2250	0	None	2250
Insurance	450	0	None	450	0	None	450
Total expense	18930	810	U	18120	1570	U	16550
Net operating income	570	3810	U	4380	2180	F	2200
Office expenses:
Variable component = (6725-5250)/25 = $59
Office expenses in flexible budget = 5250+(30*59) = $7020