Question

Problem 5: Flexible Budgeting (20 points) Unlimited Sports Cycles operates motorcycle day tours throughout the Southern California area. The company bases its monthly budgets on two measures of activity, customers and tours. Each customer pays a tour fee and is provided a motorcycle to be used for the day. For every tour, USC supplies a tour guide to make sure: 1) the customers do not get lost; and 2) do not try something they saw in the X Games (iLe, something crazy). The company used the following data in its budget preparation for April 2018: Per Month Per Tour $ 20 Per Customer $100 Guest Fee $ 400 Tour Guide Cost $85 Motorcycle Costs $250 Depreciation $100 Maintenance $10 Gas $15 $ 4,000 Administrative Salaries $1,000 S 30 Marketing Costs. wwww For April, the company budgeted for 400 customers and 150 tours. During the month, USC actually provided 160 tours for a total of 380 customers. The company's income statement showing the actual results for the month was: USC Income Statement April 2018 $36,000 Sales Cost of Sales 16,000 Tour Guides Cost Z000 13,000 Motorcycle Cost Gross Margin Administrative Cost 4,500 5.000 3.500 Marketing Cost Operating Income Required: In the appropriate section of the Answer Book, prepare: a) A planning budget. A flexible budget b) c) Show the company's volume and revenue / spending variances. Explain any key differences between managements plan and the company's actual results. d)

Answer 1

Requirement a:

Planning Budget
	Variable		Fixed	Total
	Customer	Tour
Customers				400
Hours				150
Guest fee	$40,000	$3,000		$43,000
Cost of sales:
Tour guide cost		$12,750	$400	$13,150
Motorcycle costs:
Depreciation			$250	$250
Maintenance	$4,000		$100	$4,100
Gas	$6,000			$6,000
Total motorcycle costs				$10,350
Gross margin				$19,500
Administrative salaries			$4,000	$4,000
Marketing Costs		$4,500	$1,000	$5,500
Operating income				$10,000

Variable cost for customer = 400 x Variable cost per unit of customer

Variable cost for tour = 150 x Variable cost per unit of tour

Requirement b:

Flexible budget
	Variable		Fixed	Total
	Customer	Tour
Customers				380
Hours				160
Guest fee	$38,000	$3,200		$41,200
Cost of sales:
Tour guide cost		$13,600	$400	$14,000
Motorcycle costs:
Depreciation			$250	$250
Maintenance	$3,800		$100	$3,900
Gas	$5,700			$5,700
Total motorcycle costs				$9,850
Gross margin				$17,350
Administrative salaries			$4,000	$4,000
Marketing Costs		$4,800	$1,000	$5,800
Operating income				$7,550

Variable cost for customer = 380 x Variable cost per unit of customer

Variable cost for tour = 160 x Variable cost per unit of tour

Requirement c:

	Actual	Revenue/Spending Variance		Flexible	Volume variance		Planned
Guest fee	$36,000	$5,200	U	$41,200	$1,800	U	$43,000
Cost of sales:
Tour guide cost	$16,000	$2,000	U	$14,000	$850	U	$13,150
Motorcycle costs	$7,000	$2,850	F	$9,850	$500	F	$10,350
Gross margin	$13,000	$4,350	U	$17,350	$2,150	U	$19,500
Administrative salaries	$4,500	$500	U	$4,000	$0	None	$4,000
Marketing Costs	$5,000	$800	F	$5,800	$300	U	$5,500
Operating income	$3,500	$4,050	U	$7,550	$2,450	U	$10,000

Actual - Flexible budget = Revenue / spending variance

Flexible budget - Planned budget = Volume variance

Requirement d:

A major Increase in tour guide costs and Slight increase in marketing costs leads to Unfavorable revenue variance and volume variance.