Question

Freeway Driving School offers driving lessons. The school's owner and manager has been attempting to evaluate performance and control costs using a variance report that compares the planning budget to actual results. The school performed 175 lessons but had planned on only 170 for the month of June. Management has provided the below revenue and cost standards and the Revenue and Expense Fixed element Variable element per lesson per month Instructor Wages Fuel Facility Expenses Freeway Driving School Income Statement For the Month Ended June 30 175 Actual Lessons Instructor 10,870 Fuel Facility 1,870 Total expense Req a: If the school performed 175 lessons but had planned on only 170, is managements comparison of actual results to the planning budget an appropriate comparison. Why or why not? Req b Using the information above, prepare a report showing the revenue and spending variances for each of the line items on the June income statement. Label each variance as favorable (F) or unfavorable (U). Be sure to calculate and label the total expense and total income variances

Answer 1

Solution: Part a The comparision with planning budget is not appropriate as activity level are different and total variable cost changes with changes in activity

Part b: Freeway Driving School Revenue and spending variance For the Month Ended July 31. actual results Revenue and spending variance Flexible budget b-a-c 175 Lesson sold 175 Revenue 39,240 135 U 39,375 Expenses: 10,870 3,730 2,680 1,870 4,255 23,405 15,835 155 F 405 U 95 U 90 F 100F 155 U 290 U 11,025 3,325 2,585 1,960 4,355 23,250 16,125 Instructor wages Fuel Maintenance Facility expense Adminstration Total expenses Net operating income **calculation of amount for flexible budget Fixed component variable c ent per lesson flexible budget c-a+b*175 225 Revenue 39,375 Expenses Instructor wages Fuel Maintenance 63 11,025 3,325 2,585 1,960 4,355 23,250 16,125 19 660 1,610 4,180 Facility expense Adminstration Total expenses Net operating income