Question

3. Flexible budget, planning budget, activity variances - During September, ComeHome Corporation budgeted for 36,500 customers, but actually served 35,000 customers. The company uses the following revenue and cost formulas in its budgeting, where q is the number of customers served:

• Revenue: $30.20q
• Wages: $12.50q
• Supplies: $4.20q
• Insurance: $17,400 per month
• Miscellaneous expense: $12,000 month + $2.40q

1. Prepare the company's planning budget for September (use Thursday’s lecture slides and exhibit 9-2 of your text as a guide).
2. Prepare the company's flexible budget for September (use Thursday’s lecture slides and exhibit 9-5 of your text as a guide).
3. Calculate the company’s activity variances for each line item for September (use Thursday’s lecture slides and exhibit 9-6 of your text as a guide). You must also indicate whether each specific activity variance is favorable (‘F’) or unfavorable (‘U’).

Answer 1

Ans. 1	Flexible Budget
	Customers served		35,000
	Revenue	$30.20 * 35,000	$1,057,000
	Expenses:
	Wages	$12.50 * 35,000	$437,500
	Supplies	$4.20 * 35,000	$147,000
	Insurance	$17,400	$17,400
	Miscellaneous expense	$12,000 + ($2.40 * 35,000)	$96,000
	Total expenses		$697,900
	Net operating income		$359,100
Ans. 2	Planning Budget
	Customers served		36,500
	Revenue	36,500	$1,102,300
	Expenses:
	Wages	$30.20 * 36,500	$456,250
	Supplies		$153,300
	Insurance	$12.50 * 36,500	$17,400
	Miscellaneous expense	$4.20 * 36,500	$99,600
	Total expenses	$17,400	$726,550
	Net operating income	$12,000 + ($2.40 * 36,500)	$375,750
Ans. 3	COME HOME CORPORATION
	ACTIVITY VARIANCE
	For the Month Ended SEPTEMBER 30
		Flexible Budget	Activity variance		Planning Budget
	Customers	35,000			36,500
	Revenue	$1,057,000	$45,300	U	$1,102,300
	Expenses:
	Wages and salaries	$437,500	$18,750	F	$456,250
	Supplies	$147,000	$6,300	F	$153,300
	Insurance	$17,400	$0	none	$17,400
	Miscellaneous expense	$96,000	$3,600	F	$99,600
	Total expenses	$697,900	$28,650	F	$726,550
	Net operating income	$359,100	$16,650	U	$375,750
	*Flexible budget is prepared on the basis of actual units.
	*Fixed expenses remain same as planning budget.
	Activity variance = Flexible budget - Planning budget
	*Increase in revenue or net operating income from planning budget to flexible budget =   Favorable.
	*Decrease in revenue or net operating income from planning budget to flexible budget   =   Unfavorable.
	*Increase in expenses from Planning budget to flexible budget =   Unfavorable.
	*Decrease in expenses from Planning budget to flexible budget =   Favorable.