Chapter 10

Flexible Budgets and Performance
Analysis
Solutions to Questions
10-1 The planning budget is prepared
for the planned level of activity. It is static
because it is not adjusted even if the level
of activity subsequently changes.
10-2 A flexible budget can be adjusted
to reflect any level of activity—including
the actual level of activity. By contrast, a
static planning budget is prepared for a
single level of activity and is not
subsequently adjusted.
10-3 Actual results can differ from the
budget for many reasons. Very broadly
speaking, the differences are usually due
to a change in the level of activity,
changes in prices, and changes in how
effectively resources are managed.
10-4 As noted above, a difference
between the budget and actual results can
be due to many factors. Most importantly,
the level of activity can have a very big
impact on costs. From a manager’s
perspective, a variance that is due to a
change in activity is very different from a
variance that is due to changes in prices
and changes in how effectively resources
are managed. A variance of the first kind
requires very different actions from a
variance of the second kind.
Consequently, these two kinds of
variances should be clearly separated
from each other. When the budget is
directly compared to the actual results,
these two kinds of variances are lumped
together.
10-5 An activity variance is the
difference between a revenue or cost item

in the static planning budget and the
same item in the flexible budget. An
activity variance is due solely to the
difference in the level of activity assumed
in the planning budget and the actual
level of activity used in the flexible
budget. Caution should be exercised in
interpreting an activity variance. The
“favorable” and “unfavorable” labels are
perhaps misleading for activity variances
that involve costs. A “favorable” activity
variance for a cost occurs because the
cost has some variable component and
the actual level of activity is less than the
planned level of activity. An “unfavorable”
activity variance for a cost occurs because
the cost has some variable component
and the actual level of activity is greater
than the planned level of activity.
10-6 A revenue variance is the
difference between how much the revenue
should have been, given the actual level
of activity, and the actual revenue for the
period. A revenue variance is easy to
interpret. A favorable revenue variance
occurs because the revenue is greater
than expected for the actual level of
activity. An unfavorable revenue variance
occurs because the revenue is less than
expected for the actual level of activity.
10-7 A spending variance is the
difference between how much a cost
should have been, given the actual level
of activity, and the actual amount of the
cost. Like the revenue variance, the
interpretation of a spending variance is
straight-forward. A favorable spending
variance occurs because the cost is lower

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 10

245

than expected for the actual level of
activity. An unfavorable spending variance
occurs because the cost is higher than
expected for the actual level of activity.
10-8 In a flexible budget performance
report, the static planning budget is not
directly compared to actual results. The
flexible budget is interposed between the
static planning budget and actual results.
The differences between the static
planning budget and the flexible budget
are activity variances. The differences
between the flexible budget and the
actual results are the revenue and
spending variances. The flexible budget
performance report cleanly separates the
differences between the static planning
budget and the actual results that are due
to changes in activity (the activity
variances) from the differences that are
due to changes in prices and the
effectiveness with which resources are
managed (the revenue and spending
variances).
10-9 The only difference between a
flexible budget based on a single cost

driver and one based on two cost drivers
is the cost formulas. When there are two
cost drivers, some costs may be a function
of the first cost driver, some costs may be
a function of the second cost driver, and
some costs may be a function of both cost
drivers.
10-10 When the static planning budget is
directly compared to actual results, it is
implicitly assumed that costs (and
revenues) should not change with a
change in the level of activity. This
assumption is valid only for fixed costs.
However, it is unlikely that all costs are
fixed. Some are likely to be variable or
mixed.
10-11 When the static planning budget is
adjusted proportionately for a change in
activity and then directly compared to
actual results, it is implicitly assumed that
costs should change in proportion to a
change in the level of activity. This
assumption is valid only for strictly
variable costs. However, it is unlikely that
all costs are strictly variable. Some are
likely to be fixed or mixed.

© The McGraw-Hill Companies, Inc., 2010
246

Managerial Accounting, 13th Edition

Exercise 10-1 (10 minutes)
Puget Sound Divers
Flexible Budget
For the Month Ended May 31
Actual diving-hours..............................

105

Revenue ($365.00q).............................

$38,32
5

Expenses:
Wages and salaries ($8,000 +
$125.00q)........................................
Supplies ($3.00q)...............................
Equipment rental ($1,800 +
$32.00q)..........................................
Insurance ($3,400)............................
Miscellaneous ($630 + $1.80q).........
Total expense.......................................
Net operating income...........................

21,125
315
5,160
3,400
819
30,819
$ 7,506

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 10

247

Exercise 10-2 (15 minutes)
1. The activity variances are shown below:
Flight Café
Activity Variances
For the Month Ended July 31

Meals....................................
Revenue ($4.50q).................
Expenses:
Raw materials ($2.40q)......
Wages and salaries
($5,200 + $0.30q)............
Utilities ($2,400 + $0.05q).
Facility rent ($4,300)..........
Insurance ($2,300).............
Miscellaneous ($680 +
$0.10q)............................
Total expense.......................
Net operating income...........

Plannin
g
Budget
18,000

Flexibl
e
Budget
17,800

Activity
Varianc
es

$81,000

$80,100

$900

U

43,200

42,720

480

F

10,600
3,300
4,300
2,300

10,540
3,290
4,300
2,300

60
10
0
0

F
F

2,480
66,180
$14,820

2,460
65,610
$14,490

20
570
$330

F
F
U

2. Management should be concerned that the level of activity fell
below what had been planned for the month. This led to an
expected decline in profits of $330. However, the individual
items on the report should not receive much management
attention. The unfavorable variance for revenue and the
favorable variances for expenses are entirely caused by the
drop in activity.

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
248

Managerial Accounting, 13th Edition

....580 6..80q)...... Shipping ($0.....400 830 850 20.... 5.....00q)...... $32...50q). 2010.20 0 F 4...........950 810 980 21.10 0 F © The McGraw-Hill Companies...............Exercise 10-3 (15 minutes) Quilcene Oysteria Revenue and Spending Variances For the Month Ended August 31 Revenue and Spendin g Variance s Pounds.............. All rights reserved..900 + $0.........000 Actual Results 8......680 U F U U Net operating income.......640 340 U 6..30q). Oyster bed maintenance ($3...200 3..100 200 100 U F Expenses: Packing supplies ($0. Wages and salaries ($2...300 5.... Solutions Manual......200 $3.............10 0 $2... Other ($450 + $0....05q).... Flexible Budget 8......... Total expense.000 $35.520 550 20 130 1............. Chapter 10 249 .200 4.......420 $13...000 Revenue ($4........ $11..200).... Utilities ($830).. Inc.000 3..

50 48 Revenue ($320... 13th Edition .......474 336 290 4 F Total expense.................100 1....936 1...00q) Aircraft depreciation ($7..... Inc...00q).. Fuel ($23....430 1...350 336 174 700 U 460 12......Exercise 10-4 (20 minutes) 1... The $1....... 2010.440 304 F Net operating income........ $16... Airport fees ($650 + $38....36 0 8.......836 $2........ Vulcan Flyovers Flexible Budget Performance Report For the Month Ended July 31 Flexibl Plannin Activity e g Varianc Budge Budget es t Flights (q)....41 0 U U $ 814 2........71 0 Actual Results 48 U $13...... 12.....650 494 156 124 0 U U F 8..260 2....... $ 3...........550 350 164 46 76 14 F F F F 7............13 6 $ 3..00q)..........22 4 Revenue and Spending Variances $1....710 unfavorable revenue variance is very large relative to the company’s net operating income and should be investigated...00q)....... Office expenses ($190 + $2..000 $640 U $15... The overall $336 unfavorable activity variance is due to activity falling below what had been planned for the month....... All rights reserved... Was this due © The McGraw-Hill Companies......104 2.000 + $82.00q)..00q)..150 2.. Expenses: Wages and salaries ($4........ 250 Managerial Accounting..560 $336 U 286 12.....

All rights reserved.to discounts given or perhaps a lower average number of passengers per flight than usual? The $494 unfavorable spending variance for wages and salaries is also large and should be investigated. © The McGraw-Hill Companies. The other spending variances are relatively small.. 2010. Solutions Manual. Chapter 10 251 . Inc. but are worth some management attention—particularly if they recur next month.

.300 + $24............900 30.................................. Total expense.....00q2).......00q1 +$1..00 0 Expenses: Vessel operating costs ($5...... Budgeted passengers (q2).........276 2.....520 1................................ Advertising ($1..........................................................00q2)........ $35... Net operating income.700 6...........00q1 + $2.......200 + $480... 2010.. 19.................396 $ 4.................700).......900)........400 Revenue ($25............. 252 Managerial Accounting.......604 © The McGraw-Hill Companies............. 24 1..... All rights reserved.....00q2) Insurance ($2.Exercise 10-5 (15 minutes) Alyeski Tours Planning Budget For the Month Ended July 31 Budgeted cruises (q1)............................................................ 13th Edition ............... Inc............................................ Administrative costs ($4...................

Consequently. Chapter 10 253 . but the actual results are for 105 jobs. Inc. All rights reserved.. © The McGraw-Hill Companies.Exercise 10-6 (10 minutes) The variance report compares the planning budget to actual results and should not be used to evaluate how well costs were controlled during April. the actual revenues and many of the actual costs should have been different from what was budgeted at the beginning of the period. The flexible budget amounts can then be compared to the actual results to evaluate how well revenues and costs were controlled. it is necessary to estimate what the revenues and costs should have been for the actual level of activity using a flexible budget. The planning budget is based on 100 jobs. To evaluate how well revenues and costs were controlled. Solutions Manual. 2010. Direct comparisons of budgeted to actual costs are valid only if the costs are fixed.

that this level of activity is within the relevant range. The flexible budget amounts can then be compared to the actual results to evaluate how well revenues and costs were controlled. of course. it is necessary to estimate what the revenues and costs should have been for the actual level of activity using a flexible budget that explicitly recognizes fixed and mixed costs. 254 Managerial Accounting. This procedure provides valid benchmarks for revenues and for costs that are strictly variable. 2010. each item was adjusted upward by 5%. Mixed costs should increase less than 5%. in other words.Exercise 10-7 (15 minutes) The adjusted budget was created by multiplying each item in the budget by the ratio 105/100. Fixed costs. To evaluate how well revenues and costs were controlled. All rights reserved. Inc. 13th Edition . should not increase at all if the activity level increases by 5%—providing. for example. but overstates what fixed and mixed costs should be. © The McGraw-Hill Companies..

...550 1..........80q).700 6...90 0 38...............10q).... 9..200 + $0........ Wages and salaries ($5........15 0 $ 5.. $44......000 4....15q).20q)....... Net operating income............................ Chapter 10 255 ................10 0 Expenses: Cleaning supplies ($0.............800 7...........................000 8. Maintenance ($0......000 + $0. Inc.......... 2010......95 0 © The McGraw-Hill Companies.......200 2....30q) Depreciation ($6..Exercise 10-8 (15 minutes) Lavage Rapide Planning Budget For the Month Ended August 31 Budgeted cars washed (q)...............000 Revenue ($4............................ 7......... Administrative expenses ($4.....000).000 + $0.......... Solutions Manual...90q)............000)............................. Electricity ($1... Total expense... Rent ($8... All rights reserved.....

...28 0 © The McGraw-Hill Companies............ Wages and salaries ($5....80q)........... 7.. Maintenance ($0......90q).........000).040 2........... 256 Managerial Accounting.........................................................520 1.................. $43..... Inc..........15q)..800 Revenue ($4......20q). 13th Edition ....... 8...... Net operating income..000 + $0....12 0 Expenses: Cleaning supplies ($0.. 2010......... Rent ($8.760 7......30q) Depreciation ($6.84 0 $ 5.. Electricity ($1...........640 6...Exercise 10-9 (15 minutes) Lavage Rapide Flexible Budget For the Month Ended August 31 Actual cars washed (q)..............000 8... Administrative expenses ($4......000)........88 0 37.............200 + $0..........10q).......000 + $0........... All rights reserved........ Total expense....................000 4...............

........ Depreciation ($6......10 0 Flexible Budget 8...Exercise 10-10 (20 minutes) Lavage Rapide Activity Variances For the Month Ended August 31 Cars washed (q).....520 1.80q)....120 $98 0 U 7.200 2...... Rent ($8.280 20 310 $67 0 U © The McGraw-Hill Companies........000 60 0 0 F 4. Expenses: Cleaning supplies ($0..640 6....900 38..000 7..700 6.... Administrative expenses ($4.800 Activity Variance s $43.....000 8.....000)..10q)....000 + $0..880 37....840 F F $ 5.....800 7.000 8. Chapter 10 257 ... Solutions Manual.. 2010.......550 1......... Wages and salaries ($5.....040 2...150 4. Net operating income.... All rights reserved.......... Maintenance ($0......... Planni ng Budget 9.......20q)..90q)..... Inc..000 $44.................30q).......... Total expense....760 160 30 40 F F F 7...000).... Electricity ($1...950 $ 5............200 + $0........... Revenue ($4...15q)..........000 + $0.

30q).. Inc....... Electricity ($1..000 8.............000 + $0.................520 1......... Depreciation ($6.Exercise 10-11 (20 minutes) Lavage Rapide Revenue and Spending Variances For the Month Ended August 31 Revenue and Spending Variances Flexibl e Budget 8....760 2. .560 520 U 2...670 2....000).280 $ 3...000 8.950 U Total expense...... $ 5....080 $ 40 U 7.... Rent ($8...... Administrative expenses ($4...15q)...........500 6. All rights reserved.040 7... 258 Managerial Accounting....80q)........... U U © The McGraw-Hill Companies...880 4. Expenses: Cleaning supplies ($0..000 + $0... 13th Edition ... 2010..........10 0 $2.......140 70 2....10q)........ 37.. Wages and salaries ($5...940 Net operating income.....000 860 0 0 U 4..260 150 500 U U 7...000 8..14 0 Cars washed (q)...90q). Maintenance ($0.20q)..000).... Revenue ($4.800 $43.....640 6.200 + $0.800 Actual Results 8....840 39....12 0 $43......

..000 8.... Maintenance ($0..15q).......700 6......640 6...000 60 0 0 F 7. 38... Chapter 10 259 . Electricity ($1....10 0 $2..14 0 U $ 3...10q).000 Activity Variance s Flexibl e Budget 8.....150 310 F 37..... 2010... Depreciation ($6. All rights reserved......000 + $0....... Administrative expenses ($4..040 2..000)........ $ 5.. Solutions Manual............000 8.80q)... Expenses: Cleaning supplies ($0...080 © The McGraw-Hill Companies...950 Total expense.. $44...950 $670 70 2.....200 + $0.....800 160 30 40 F F F 7.30q).800 4 0 U $43.500 6...................200 2.........000 + $0...900 20 F 4..12 0 7.......760 520 150 500 U U U 7........940 Net operating income..140 U $ 5...280 $ Actual Results 8.....90q)................... Rent ($8...840 U 39.100 $980 U $43...20q).000 4....Exercise 10-12 (30 minutes) Lavage Rapide Flexible Budget Performance Report For the Month Ended August 31 Cars washed (q). Wages and salaries ($5....520 1..550 1...000).... Plannin g Budget 9.260 7..000 860 0 0 U 8.............560 2........000 8...670 2.....800 Revenue and Spending Variance s Revenue ($4..880 U 4........ Inc.....................

.......700)...800 1...700 $90.. Total manufacturing cost..800)...25 0 36.. © The McGraw-Hill Companies.... 2010...500 1...000 Direct materials ($4.400 + $0...Exercise 10-13 (10 minutes) Wyckam Manufacturing Inc.....05q). Utilities ($1.. 5.. 13th Edition .... Depreciation ($16...700 12........650 16...60 0 Direct labor ($36...25q)......... Insurance ($12.. Planning Budget for Manufacturing Costs For the Month Ended June 30 Budgeted machine-hours (q). $21.30q)... Supplies ($0. All rights reserved......... Inc. 260 Managerial Accounting..700)....

..720 2....900 Activity Variances $129..940 1...40q)...820 119.....080 70.......... Expenses: Wages and salaries ($23.Exercise 10-14 (20 minutes) Jake’s Roof Repair Activity Variances For the Month Ended May 31 Repair-hours (q).....480 11..200 + $16...... Total expense. Planning Budget 2.330 3....67 0 F © The McGraw-Hill Companies...780 $1.............760 40 U 11..50q)...... 2010.500 + $0....740 117.45 0 F 68.80q).840 24.......70q)...470 24..050 $4.....630 860 U U 2.........480 170 0 U 6...800 U U $ 7............60q)....160 3....480).. Net operating income.. Administrative expenses ($4.020 6....800 $124.30q)... Parts and supplies ($8...250 80 2...... All rights reserved.. Chapter 10 261 .... Inc. Rent ($3....580 $ 9.. Equipment depreciation ($1.60 0 Flexible Budget 2. Revenue ($44....600 + $0..... Truck operating expenses ($6.. Solutions Manual..400 + $1.......

..........900 $18....64 0 $3. Expenses: Raw materials ($4.400 $71........350 29..270 2. 13th Edition ...600)...280 2...... Wages ($5..600 1.......350).. Utilities ($1.....65q).Exercise 10-15 (20 minutes) Via Gelato Revenue and Spending Variances For the Month Ended June 30 Revenue and Spending Variances Flexible Budget 6..... Insurance ($1.. All rights reserved..230 13.600 1....590 52....20q)..........350 400 420 400 0 0 U F U 2.650 2.820 52............ Inc.. $74........... 2010.54 0 $2.. $21..35q)............860 U 28.200 Actual Results 6. 262 Managerial Accounting..... Total expense.........40q)..630 + $0..750 230 150 F U Net operating income...010 U Liters (q)...........600 + $1...860 3...... © The McGraw-Hill Companies..200 Revenue ($12..........870 2..... Miscellaneous ($650 + $0.... Rent ($2.00q).830 14........

.......400 50 U 6........680 346 25 0 U U 3... Advertising expenses ($970)....450 4. 2010........170 $ 1.. All rights reserved.050 995 1.... Chapter 10 263 .............. Inc......... Solutions Manual.... Insurance ($1....000 $720 F $18....590 191 40 $190 F U F 465 17.........................................00q).720 $230 F $18.............700 970 1...........400).00q)....680 650 17.....680)... Office expenses ($2........650 70 U 4..... Revenue ($360................704 970 1. Total expense................ Miscellaneous expenses ($500 + $3...720 190 F 4...400 0 6...Exercise 10-16 (30 minutes) AirQual Test Corporation Flexible Budget Performance Report For the Month Ended February 28 Jobs (q)....... Expenses: Technician wages ($6.00q)........050 $ 950 6 80 $640 U 656 U 17...130 F $ 1.....680 4 0 0 U 2.780 Actual Results 52 © The McGraw-Hill Companies........530 2....950 6....... Net operating income. Mobile lab operating expenses ($2...900 + $35..600 + $2........00q)... Flexibl e Budget 52 Revenue and Spendin g Variance s Plannin g Budget 50 Activity Varianc es $18....

...260 4.. Campus rent ($4.......... 9...........200)................................................. Classroom supplies ($260q2).............. The planning budget based on 3 courses and 45 students appears below: Gourmand Cooking School Planning Budget For the Month Ended September 30 Budgeted courses (q1)........................................................... Net operating income..................................920 1...... The flexible budget based on 3 courses and 42 students appears below: Gourmand Cooking School Flexible Budget For the Month Ended September 30 Actual courses (q1).........21 5 2.................Exercise 10-17 (45 minutes) 1....................49 5 31................. Classroom supplies ($260q2)...............260 © The McGraw-Hill Companies.. 2010.... 3 42 Revenue ($800q2)..... Utilities ($870 + $130q1)..........................................080q1). Utilities ($870 + $130q1)..........700 1.............................................................................. Insurance ($1... $36...240 10... 3 45 Revenue ($800q2). Budgeted students (q2)............... Total expense................................890 3.............. All rights reserved............ Inc...........78 5 $ 4...........200 1.....080q1)..............................270 + $15q1 + $4q2).... Actual students (q2)..890).......... Administrative expenses ($3.............. 13th ...... $33...........................60 0 Expenses: Instructor wages ($3......... 264 Edition Managerial Accounting..................... 9......00 0 Expenses: Instructor wages ($3.......................240 11......

............890). All rights reserved...............60 7 © The McGraw-Hill Companies..................... Net operating income..................... Chapter 10 265 ...48 3 30...................... Total expense................ Inc...... 2010...............99 3 $ 2................. 4.200).. Insurance ($1.......................200 1... Administrative expenses ($3............................Campus rent ($4.........890 3......... Solutions Manual..........270 + $15q1 + $4q2)........

. Flexibl e Budge t U F U Actual Results 3 42 $33..60 0 $1.963 F 29...530 4.200 1.270 + $15q1 +$4q2)..370 U $32...030 $ 763 F $ 3.... 266 Managerial Accounting.200 1.20 0 9..080q1)...890 3.890 0 780 0 0 0 3..495 12 F Total expense. Activity Variance s 3 45 Revenue and Spending Variances 3 42 $36...240 10. All rights reserved...48 3 30...00 0 $2.40 0 © The McGraw-Hill Companies... Inc. $ 4.920 1..200)............99 3 $ 2.200 1...........240 11.. Campus rent ($4.700 1............. Administrative expenses ($3....080 8....... Insurance ($1. Expenses: Instructor wages ($3..215 792 $1....260 4... Students (q2)... Utilities ($870 + $130q1).. 31...40 0 9...............Exercise 10-17 (continued) 3.........60 7 160 2.....60 8 Revenue ($800q2).... 2010......380 270 0 0 F F U 9... 13th Edition .. The flexible budget performance report for September appears below: Gourmand Cooking School Flexible Budget Performance Report For the Month Ended September 30 Plannin g Budget Courses (q1)....... Classroom supplies ($260q2).540 1....890 307 U 3.785 F Net operating income....790 1......260 4..890)................

...........100 + $0..600 Indirect labor ($8.......000 12.......300 52..400 + $0. Solutions Manual............................000 + $3. 8.....80q)......90q)........ Packaging Solutions Corporation Production Department Planning Budget For the Month Ended March 31 Budgeted labor-hours (q).... Note that the report does not include revenue or net operating income because the production department is a cost center that does not have any revenue.100)......... Supplies ($1.. Inc.... Factory rent ($8...400 Direct labor ($15..........50 0 2........ The flexible budget appears below..........60q)......100 26...... Like the planning budget...... $132..... this report does not include revenue or net operating income because the production department is a cost center that does not have any revenue.... Utilities ($6...60q)............ Utilities ($6. All rights reserved....200 + $1............. 2010..800 4..40q).... Factory administration ($11.40q).640 13. $126..........000 Direct labor ($15..80q)...400).......... Chapter 10 267 ........... 8...........100 + $0..... The planning budget appears below.........70q). Supplies ($1......80q).............. © The McGraw-Hill Companies....... Property taxes ($2................40 0 21......Exercise 10-18 (45 minutes) 1.. Packaging Solutions Corporation Production Department Flexible Budget For the Month Ended March 31 Actual labor-hours (q)......... 8........200 + $1.... Total expense........700 + $1......80q).................. Equipment depreciation ($23.................72 0 21.......400 2.900 $254..............120 4...460 Indirect labor ($8....................400 + $0.......

...... 54..700 + $1....90q)............660 $264......... 13th ..........70q)..................400 2.....................100 27........000 + $3.. Inc........ Total expense. Factory rent ($8.............400).080 8................100).Equipment depreciation ($23....................... Factory administration ($11... All rights reserved..18 0 © The McGraw-Hill Companies. 2010.... Property taxes ($2............................. 268 Edition Managerial Accounting.........

.32 0 21.....100 0 300 0 760 $9. Factory rent ($8.120 4.080 8.31 0 U 19.90 0 $254......400 2.........800 4.40q).........47 F 0 $265..70q)..... Packaging Solutions Corporation Production Department Flexible Budget Performance Report For the Month Ended March 31 Labor-hours (q).400 U $132..49 U 0 © The McGraw-Hill Companies.....980 54...000 + $3. Indirect labor ($8.. All rights reserved.Exercise 10-18 (continued) 3..... 2010....000 Activity Variance s $126... Equipment depreciation ($23.18 0 1.860 14........... Property taxes ($2.450 520 F U U 1.68 0 U 27.. Solutions Manual.......40 0 $6.....660 $264. Chapter 10 269 .. Direct labor ($15.... Total expense..780 1. Factory administration ($11.080 U 8.....80q). Plannin g Budget 8....190 $1....600 8........400 2...400 + $0.....100)....200 + $1...000 12.100 26.......300 52...50 0 Flexible Budget 8. Utilities ($6.........480 0 0 U 54...01 0 $134.. Inc..570 4.60q). Supplies ($1.100 + $0......100 26......... The flexible budget performance report appears below..90q)..700 + $1..400 Spendin g Variance s Actual Results 8..........73 U 0 640 320 160 U U U 21.............640 13....80q)...72 0 $2.... This report does not include revenue or net operating income because the production department is a cost center that does not have any revenue.460 1..400)....700 2...

2010. 270 Managerial Accounting.460 = 11. the overall unfavorable spending variance of $1.Exercise 10-18 (continued) 4. Why did the unfavorable—and favorable—variances occur? Even the relatively small unfavorable spending variance for supplies of $520 should probably be investigated because.310 may be of concern to management. The production manager certainly should not be held responsible for this unfavorable variance if this increased activity was due to more orders or more sales.680 occurred because the actual level of activity exceeded the budgeted level of activity. as a percentage of what the cost should have been ($520/$4. All rights reserved. this variance is fairly large.7%). The overall unfavorable activity variance of $9. © The McGraw-Hill Companies. 13th Edition . Inc.. On the other hand.

2010. However. so it may not justify investigation. © The McGraw-Hill Companies. This variance is very small relative to the size of the revenue. the actual revenues and many of the actual costs should have been different from what was budgeted at the beginning of the period.. This results in a spurious unfavorable variance for instructor wages. should have increased by more than 3% because of the increase in activity. so the profit was up by only $50—not $435 as it should have been. Inc. instructor wages. fuel costs were much higher than expected. but the variance report assumes that they should not have increased at all. the net operating income should have been up $435 over budget. costs seem to have been adequately controlled. Most of the other spending variances were favorable. The budgeted net operating income was $8. Perhaps most importantly. so with the exception of this item.Problem 10-19 (45 minutes) 1. For example. The variance report should not be used to evaluate how well costs were controlled.080.030 and the actual net operating income was $8. There are many reasons for this—as shown in the revenue and spending variances. it wasn’t. Consequently. but the actual results are for 155 lessons—an increase of more than 3% over budget. 2. The overall activity variance for net operating income was $435 F (favorable). 3. Direct comparisons of budgeted to actual costs are valid only if the costs are fixed. a variable cost. Solutions Manual. Chapter 10 271 . The spending variance for fuel was $425 U (unfavorable) and may have been due to an increase in the price of fuel that is beyond the owner/manager’s control. In addition. the planning budget was based on 150 lessons. All rights reserved. In July. That means that as a consequence of the increase in activity from 150 lessons to 155 lessons. See the following page. the unfavorable revenue variance of $200 indicates that revenue was slightly less than they should have been.

......890 2.....330 1.250 + $2q)...075 5.100 9............Problem 10-19 (continued) TipTop Flight School Flexible Budget Performance Report For the Month Ended July 31 Lessons (q)....325 2....240 + $1q) Total expense..700 2. Aircraft depreciation ($38q). Administration ($3... 13th Edition $33...........250 2.......10 0 $200 U 325 190 75 60 U U U U 10. 272 Revenue and Spendin g Variance s Managerial Accounting.870 5...90 0 ... All rights reserved....390 205 0 425 60 F U U 9.........635 $ 8...............550 3..390 24.........750 5...... Planni ng Budget 150 Activity Variance s $33.450 10 5 665 $ 435 U U U F 1....... Maintenance ($530 + $12q)..........320 25.....750 2..... Ground facility expenses ($1...........970 $ 8. 2010.. Inc......465 20 75 185 $385 F F U U 1...... Net operating income...080 © The McGraw-Hill Companies. Expenses: Instructor wages ($65q)............ Revenue ($220q)..00 0 $1.540 3......890 2...395 25.560 3. Fuel ($15q).820 $ 8......030 Flexibl e Budget 155 Actual Results 155 F $34.....

440 2...500 6........ Chapter 10 273 . Rent ($1. 2010..440 0 0 0 $ 9..500 1...... The overall unfavorable activity variance of $3.. Solutions Manual....Problem 10-20 (30 minutes) 1.000 500 $ 50 1.30 0 7........ Utilities ($500)..00q).... Total expense..80 0 1...............260 300 0 70 F F U 11...................75 0 300 $3. However......500 1....... which would seem to indicate that costs were well-controlled......260 spending variance for lab tests is curious......000 + $2..... Lucia Blood Bank Flexible Budget Performance Report For the Month Ended September 30 Liters of blood collected (q)...180 2. Planni ng Budget 500 Spendin g Variance s Activity Varianc es Flexibl e Budget 620 $ 7.. In this case.74 0 $31..250 $28.50q)....... There is no reason to investigate this particular variance... All rights reserved....800 1....500).... Medical supplies ($15.25 0 6...000). Performance should be evaluated using a flexible budget performance report..000 500 $1.... Administration ($10..54 0 11...... The overall spending variance is $750 F........ the favorable $1..000 2. Lab tests ($12....29 0 190 $ 75 0 U U U U U U F Actual Result s 620 $ 9....000 570 11.. St.......540 was caused by the 24% increase in activity..........550 $32...00q)..54 0 2. The fact that © The McGraw-Hill Companies.. Inc... Equipment depreciation ($2..... the report will not include revenues (shown in East Caribbean dollars)...

Was more equipment obtained to collect the additional blood? © The McGraw-Hill Companies.this variance is favorable indicates that less was spent on lab tests than should have been spent according to the cost formula. Why? Did the blood bank get a substantial discount on the lab tests? Did the blood bank fail to perform required lab tests? If so. 2010. the unfavorable spending variance of $300 for equipment depreciation requires some explanation. All rights reserved. Inc. 274 Managerial Accounting.. 13th Edition . was this wise? In addition.

The variable costs would naturally be less than budgeted. Costs that are variable will naturally be different at these two different levels of activity. All three of the variable costs have large unfavorable spending variances and those variances are significantly larger than the one favorable spending variance on the report. The company should use a flexible budget approach to evaluate cost control. they do not do a good job of showing whether variable costs were controlled.000 machine-hours are compared to what the costs should have been for that level of activity. the level of activity in the factory is also likely to have chronically been below budget. The spending variances indicate that costs were not controlled by the Assembly Department. No wonder the production supervisors have been pleased with the reports. 2010. 4. the variances for variable costs have likely been favorable simply because activity has been less than budgeted in the production departments. Since sales have chronically failed to meet budget. See the following page. Although the cost reports do a good job of showing whether fixed costs were controlled. Inc. 2. Consequently. All rights reserved. The flexible budget performance report provides a much clearer picture of the performance of the Assembly Department than the original cost control report prepared by the company. Solutions Manual. 3. Chapter 10 275 . The cost reports are of little use for assessing how well costs were controlled. © The McGraw-Hill Companies.Problem 10-21 (45 minutes) 1. the actual costs incurred in working 35. The problem is that the company is comparing budgeted costs at one level of activity to actual costs at another level of activity.500 F (favorable) which simply reflects the fact that the actual level of activity was significantly less than the budgeted level of activity. Under the flexible budget approach.. The overall activity variance is $13.

.....000 F $ 28.50 0 F Spendin g Variance s Actual Results 35.......00 0 20.000 2.. Supplies ($0..000 60........ 276 Managerial Accounting.000 $234......000 60...70 0 2.000 0 0 F F $13.... Indirect materials ($1.000 56... Wages and salaries ($80..........000 $ 4.70 0 U $240......000 80..800 800 0 U U F 19.40q)*...00 0 $248........80q)*. Equipment depreciation ($60.. Inc.... Total.........Problem 10-21 (continued) 3..20 0 *The variable cost per machine-hour is obtained by dividing the total variable cost from the planning budget by 30.000 U $ 29.500 7.000).....00 0 Activity Variances Flexible Budget 35.....000).......50q)*. All rights reserved.....200 60...000 $1........ © The McGraw-Hill Companies..800 79........000 $ 32...000 2. 2010.....700 17.........50 0 $5...500 49.... Plannin g Budget 40.500 51...000 80.... 13th Edition ... Scrap ($0..... Assembly Department Flexible Budget Performance Report For the Month Ended March 31 Machine-hours (q)......000 machine-hours...

....42 0 4....................006 0 52 1......... 2010......... Miscellaneous ($820 + $0................... Total expense......... Spendin g Variance s Plannin g Budget 1... Deliveries (q2).830 1. Expenses: Pizza ingredients ($3....20 0 $540 F $16... All rights reserved.................50q1)...830 1.....830)............. Chapter 10 277 .... Revenue ($13. Solutions Manual.......240 174 U 15... Milano Pizza Flexible Budget Performance Report For the Month Ended November 30 Pizzas (q1).595 428 $252 U F F U F F Actual Results 1.......185 130 $410 U 15... Delivery vehicle ($540 + $1.............573 F $ 1.50q2).......560 5.240 174 $16.....985 5.....220 690 630 810 152 0 2 21 9 U 4......05q1)................... Equipment depreciation ($275)..................830 954 15...281 984 609 655 275 0 275 0 275 1.................80q1).......847 © The McGraw-Hill Companies.015 $ 1...... Delivery person ($3. Net operating income..145 F $ 1....50q2)....................200 180 Activity Variance s Flexibl e Budget 1...74 0 $680 F $17.. Rent ($1.712 5...000 0 6 1.15q1)..220)... Utilities ($630 + $0....220 692 609 801 273 61 292 0 146 U U U 4.... Inc..Problem 10-22 (30 minutes) 1. Kitchen staff ($5....

so the activity variances for the delivery person and the delivery vehicle are favorable. 278 Managerial Accounting. In contrast. the actual number of deliveries is less than budgeted. 2010. This occurs because there are two cost drivers (i. Inc.. The actual number of pizzas delivered is greater than budgeted. 13th Edition .e. and miscellaneous are unfavorable. so the activity variance for revenue is favorable. utilities. measures of activity) and one is up while the other is down.Problem 10-22 (continued) 2.. but the activity variances for pizza ingredients. © The McGraw-Hill Companies. Some of the activity variances are favorable and some are unfavorable. All rights reserved.

60q)... Total...... Supplies ($0.....000 151.........30q)........000 7...........200 2..80 0 The activity variances are all favorable because the actual activity was less than the planned activity and therefore all of the variable costs should be lower than planned in the original budget.00 0 $330.. Inc..000 + $1..000 $ 23...000 + $0..........000 Flexibl e Budget 26.. Plannin g Budget 30. 2010. The activity variances are shown below: FAB Corporation Activity Variances For the Month Ended March 31 Machine-hours (q)..600 + $0.........10q). Solutions Manual. Chapter 10 279 F ...............000)..800 F F 70.....000 $ 23..... Utilities ($20.Problem 10-23 (30 minutes) 1.20 0 81.................... Maintenance ($40...70q)....600 $ 400 F 6. © The McGraw-Hill Companies.........00 0 $341.... Depreciation ($70.. All rights reserved. Indirect labor ($130..........80 0 0 Activity Variances $10.............400 F 9......200 1.....800 148..60 0 70....60 0 88........

... While this makes intuitive sense....000). sometimes a favorable variance may not be good......400 149...400 U U 70..000 U 3...500 F 7..30q).. Total. Since these variances are all fairly large......20 0 78.. 13th Edition . All rights reserved.......80 0 1........000 Actual Results 26...Problem 10-23 (continued) 2....800 148...... A favorable spending variance means that the actual cost was less than what the cost should have been for the actual level of activity..... Indirect labor ($130.. 280 Managerial Accounting.70q).500 U $1........... 2010.. The spending variances are computed below: FAB Corporation Spending Variances For the Month Ended March 31 Machine-hours (q)..200 8... Maintenance ($40...10q).....000 Spending Variances $ 23.. Utilities ($20.........80 0 71...........20 0 81.... Flexible Budget 26. the rather large favorable variance for maintenance might have resulted from performing less maintenance......600 + $0.... they should all probably be investigated....60q). For example..000 U An unfavorable spending variance means that the actual cost was greater than what the cost should have been for the actual level of activity........000 + $1.........600 600 1.............000 + $0....... © The McGraw-Hill Companies. Depreciation ($70....... Inc....50 0 $331. Supplies ($0....00 0 $330....600 $ 24.....100 $1....

to actual results for 38. Costs that are variable or mixed should be higher when the activity level is 38.000 machinehours.000 rather than 35. 2010. All rights reserved.000 machine-hours.Problem 10-24 (45 minutes) 1.. The cost control report compares the planning budget. © The McGraw-Hill Companies. Solutions Manual. This is like comparing apples to oranges. Inc. which was prepared for 35.000 machine-hours. The cost control report prepared by the company should not be used to evaluate how well costs were controlled. Chapter 10 281 . Direct comparisons of budgeted to actual costs are valid only if the costs are fixed.

.900 1............ © The McGraw-Hill Companies. Supplies ($0.000 80...300 15................ Inc. All rights reserved.00 0 $380...30 0 300 200 0 0 $1....000 80..... Total..800 U U 3. Plannin g Budget 35..600 15... Supervision ($38...60q).....Problem 10-24 (continued) 2..000).... Direct labor wages ($2...000)..100 137...000 80......30 0 300 137.... 2010...10 0 F U F U F Actual Results 38.000 + $1...00 0 $381.500 38.000 $ 80.000 15.............10q)..70 0 Activity Variances $ 6. 282 Managerial Accounting.. 13th Edition .. Maintenance ($92.30q).......... Utilities ($11...800 $1..000 Spending Variance s $ 87.40 0 22...700 + $0....20q)..00 0 $368..10 0 23....000 134... A report that would be helpful in assessing how well costs were controlled appears below: Freemont Corporation—Machining Department Flexible Budget Performance Report For the Month Ended June 30 Machine-hours (q).. Depreciation ($80...000 $ 86.600 300 0 U U 0 $12......700 38...........60 0 U Flexible Budget 38.50 0 21...20 0 Note that in this new report the overall spending variance is favorable—indicating that costs were most likely under control..200 38.

$5 = ($135 × 40 − $5..... Office expenses.. The average fixed cost should decrease as the level of activity increases and should increase as the level of activity decreases.... 2..... we first need to determine the cost formulas as follows.. Chapter 10 283 .. only variable costs should be constant on a per unit basis.. was the favorable $9 variance per exchange for rent due simply to the increased volume or did the company actually save any money on its rent? Because of this ambiguity....... This makes it difficult to interpret the variance for a mixed or fixed cost..... This approach implicitly assumes that all costs are strictly variable. Variable cost $5... Solutions Manual.... In this case.....200 + $5q Equipment depreciation. the report prepared by the bookkeeper is not as useful as a performance report prepared using a flexible budget..... For example. equipment depreciation..800 = $45 × 40 $200 = $5 × 40 © The McGraw-Hill Companies..800 $200 $1.... the actual level of activity was greater than the budgeted level of activity...... To construct such a report....... and insurance) should decline and show a favorable variance..... where q is the number of exchanges completed: Revenue.........200 is fixed. $165q $5... 2010...... As a consequence. The report prepared by the bookkeeper compares average budgeted per unit revenues and costs to average actual per unit revenues and costs.. Rent. $395q Legal and search fees.. $400 The revenue all comes from fees. A flexible budget performance report would be much more helpful in assessing the performance of the company than the report prepared by the bookkeeper.Problem 10-25 (45 minutes) 1.. rent... Insurance....200)/40 $400 = $10 × 40 $1. All rights reserved. the average cost per unit for any cost that is fixed or mixed (such as office expenses........ Inc..

400 $2....... Insurance ($200)...400 0 0 1..400 50 U 5....... Rent ($1.........700 U 1.. Plannin g Budget 40 Spending Variance s Activity Variances Flexible Budget 50 Revenue ($395q). However.... Equipment depreciation ($400)....... The overall favorable activity of $2...............200 5....... On the one hand........ Office expenses ($5.450 150 U 5.10 0 $1........250 6. All rights reserved...... 2010....... the increase in the number of exchanges completed was positive..050 3.................600 1..800)......250 indicates that the net operating income should have increased by that amount because of the increase in activity. Inc....... $ 1.200 Net operating income.650 U 8.950 F $19.60 0 U $ 2..... Total expense.800 $3..........200 + $5q)....800 200 16.............650 0 0 1..250 F $ 3.100 U 1.800 200 17...........Problem 10-25 (continued) Exchange Corp Flexible Budget Performance Report For the Month Ended May 31 Exchanges completed (q).....600 Actual Results 50 Expenses: Legal and search fees ($165q)..... 284 Managerial Accounting..250 950 U 9.800 200 14. $15... 13th Edition ......750 $ 50 0 U $19.. the net operating © The McGraw-Hill Companies... 400 0 400 0 400 1........

Inc. This was due to the unfavorable revenue variance and a number of unfavorable spending variances. all of which should be investigated by the owner.income did not actually increase by nearly that much. 2010.. All rights reserved. Solutions Manual. Chapter 10 285 . © The McGraw-Hill Companies.

.............. $2......000 42.000q1).... $500 = $54.15 × $43.080q1 +$40q2.... Printed programs ($250q2)...........200 o $1..400 + $1....000q2................. costumes. Theater hall rent ($500q2). costumes. and props: $18.. 286 Edition Managerial Accounting...... 126....000 = $108.000 = $216.....000 ÷ 108.. $336............ Actual number of performances (q2).. Variable with respect to the number of performances..... $2..400 25......... Variable with respect to the number of productions..000 ÷ 6.400 = 0........ 7 168 Actors’ and directors’ wages ($2..........200 Stagehands’ wages ($300q2)..... o Theater hall rent: $500q2.. Variable with respect to the number of performances.. o Publicity: $2..... where q 1 is the number of productions and q2 is the number of performances: o Actors’ and directors’ wages: $2.75 × $43.......400 ÷ 108.. o Ticket booth personnel and ushers’ wages: $150q 2... Scenery.000q2).200) ÷ 108 The Little Theatre Flexible Budget For the Year Ended December 31 Actual number of productions (q1)......... $150 = $16.. 2010..000 ÷ 108.. 13th ..000 84........... o Scenery....200) ÷ 6 o $40 = (0..... Variable with respect to the number of performances...200 ÷ 108.000 = $12... Ticket booth personnel and ushers’ wages ($150q2)..000q1. $250 = $27.. Variable with respect to the number of productions.... Inc.....Case 10-26 (75 minutes) 1... $18....00 0 50.. o Printed programs: $250q2. and props ($18......10 × $43... $300 = $32...000 ÷ 108..........000 © The McGraw-Hill Companies..... o Administrative expenses: $32......080 = (0...... o $32...... All rights reserved........... Variable with respect to the number of performances........ The cost formulas for The Little Theatre appear below..... o Stagehands’ wages: $300q2....000 ÷ 6....000q1. Variable with respect to the number of performances.

...........28 0 © The McGraw-Hill Companies..........................680 $724....Publicity ($2.......... All rights reserved... Chapter 10 287 . Administrative expenses ($32...............080q1 + $40q2).................. Solutions Manual....... Inc........000 46..... 2010.........400 + $1............. 14...... Total expense.......................000q1)........................

......Case 10-26 (continued) 2..000 54......600 78..000 U 84.000 108....000 16....68 U 0 $724.......28 U 0 820 $2.200 700 U 25.62 0 U 47.00 U 0 U 50.........000q1).....80 0 Flexible Budget 7 168 $336.000 12...300 15.000 U 126. Administrative expenses ($32... The flexible budget performance report follows: The Little Theatre Flexible Budget Performance Report For the Year Ended December 31 Number of productions (q1).. and props ($18.....480 $215....000 4...90 0 U U © The McGraw-Hill Companies. Printed programs ($250q2)...... Inc.... Theater hall rent ($500q2).. Publicity ($2.000 3..000 2...000q1).400 $120.....20 0 $508..00 0 32.000 U 14.... 13th Edition ...100 U F F U 130...000 U 42.. Stagehands' wages ($300q2).80 0 49.. 288 Managerial Accounting.....500 $726.900 18..... Number of performances (q2) Actors' and directors' wages ($2...600 6..80 0 700 U F $341.200 9. All rights reserved.000 38. Plannin g Budget 6 108 Activity Variances $216.080q1 + $40q2)....000 15.......400 Spendin g Variance s Actual Results 7 168 $5. costumes...48 0 46...000 27..00 0 18..400 + $1..100 3... Total expense..700 1.....000 30. 2010.000q2).700 25...... Ticket booth personnel and ushers' wages ($150q2). Scenery.......000 43.

© The McGraw-Hill Companies. Chapter 10 289 . 2010. For example. Consequently. props. Average costs may not be very good indicators of the additional costs of any particular production or performance. actors and directors) that may warrant additional spending. Inc.4%. In addition. All rights reserved. These unfavorable variances are offset by favorable variances for theater hall rent and the printed programs. a production of Peter Rabbit may require only half a dozen actors and actresses and fairly simple costumes and props. They have saved in some areas and have apparently transferred the funds to other areas that may favorably impact the quality of the theater’s productions. management should be congratulated. Assuming that the quality of the printed programs has not noticeably declined and that the favorable variance for the rent reflects a lower negotiated rental fee. the pattern of the variances may reflect good management. Managers of theater companies know that they must estimate the costs of each new production individually—the average costs are of little use for this purpose. 4. On the other hand. both the production costs and the cost per performance will be much higher for Cinderella than for Peter Rabbit.Case 10-26 (continued) 3. costumes. less than 0.. Solutions Manual. The averages gloss over considerable variations in costs. The largest unfavorable variances are for value-added activities (scenery. This suggests that costs are under control. The overall unfavorable spending variance is a very small percentage of the total cost. a production of Cinderella may require dozens of actors and actresses and very elaborate and costly costumes and props.

or recommendations.. If the general manager insists on keeping the misleading $21. 2010. he is ethically bound to properly accrue the expenses on the report—which will mean an unfavorable variance for industrial engineering and an overall unfavorable variance. but even if the bill does not arrive. This creates pressure to bend the truth since reality isn’t always positive.” Failing to disclose the entire amount owed on the industrial engineering contract violates this standard. Kemper would have little choice except to take the dispute to the next higher managerial level in the company. This would require a great deal of personal courage. Collaborating in this attempt to mislead corporate headquarters violates the credibility standard in the Statement of Ethical Professional Practice promulgated by the Institute of Management Accountants.000 variance for industrial engineering on the final report. Inc. If the performance report is being used as a way of “beating up” managers. Individuals will differ in how they think Kemper should handle this situation. corporate headquarters may be creating a climate in which managers such as the general manager at the Wichita plant will feel like they must always turn in positive reports. It would be misleading to exclude part of the final cost of the contract. analyses.Case 10-27 (30 minutes) It is difficult to imagine how Tom Kemper could ethically agree to go along with reporting the favorable $21. It is important to note that the problem may be a consequence of inappropriate use of performance reports by corporate headquarters. © The McGraw-Hill Companies. even if the bill were not actually received by the end of the year. The credibility standard requires that management accountants “disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports. All rights reserved. 13th Edition . 290 Managerial Accounting. he should firmly state that he is willing to call Laura. In our opinion.000 favorable variance on the report.

..... Insurance ($100q2). actual variable costs such as gasoline can’t be compared to the “budgeted” cost.. the “monthly budget” figures are unrealistic benchmarks..... o Outside repairs: $75 per auto per month.....Case 10-28 (45 minutes) 1...000/12 Boyne University Motor Pool Spending Variances For the Month Ended March 31 Flexibl e Budget 63...... For example....120 7.. Total............ Given... Autos (q2).. 2....000 21 Gasoline ($0.. parts ($0...............04q1).... because © The McGraw-Hill Companies...575 2..100 7.....540 2.. All rights reserved.000 21 Actual Result s 63..250 $28.... The flexible budget can be prepared using the following cost formulas: o Gasoline: $0.... Given.35 0 Vehicle depreciation ($250q2)...540 per month............450 $ 9...540 5.200/12 o Salaries and benefits: $7...................... Oil.......... ... minor repairs...... Solutions Manual... $100 = $1. or for variations in the number of automobiles used... .. Chapter 10 291 .....43 5 Miles (q1)..420 2...... 2010. minor repairs........ Salaries and benefits ($7.04 0 Spendin g Variance s $100 F 160 155 20 0 F F U 0 $395 F 2.. The original report is based on a static budget approach that does not allow for variations in the number of miles driven from month to month........15 per mile. Given..04 per mile...... As a result.......540).25 0 $28......520 1...... o Vehicle depreciation: $250 per auto per month. $ 9....15q1). o Oil. $75 = $900/12 o Insurance: $100 per auto per month. Inc... $250 = $3.. 5........ Outside repairs ($75q2).. parts: $0..360 1.

2010. Inc. The performance report in part (1) above is more realistic because the flexible budget benchmark is based on the actual miles driven and on the actual number of automobiles used during the month. 292 Managerial Accounting..the monthly budget is based on only 50. © The McGraw-Hill Companies.000 miles rather than the 63. All rights reserved. 13th Edition .000 miles actually driven during the month.

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