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Chapter 09 Flexible Budgets and Performance Analysis

Chapter 9
Flexible Budgets and Performance
Analysis
Solutions to Questions
9-1 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.
9- A fexible budget can be adjusted to refect any level of activityincluding the actual
level of activity. By contrast, a static planning budget is prepared for a single level of activity
and is not subsequently adjusted.
9-! Actual results can dier fro! the budget for !any reasons. "ery broadly spea#ing,
the dierences are usually due to a change in the level of activity, changes in prices, and
changes in ho$ eectively resources are !anaged.
9-" As noted in %&' above, a dierence bet$een the budget and actual results can be due
to !any factors. (ost i!portantly, the level of activity can have a very big i!pact on costs.
)ro! a !anager*s perspective, a variance that is due to a change in activity is very dierent
fro! a variance that is due to changes in prices and changes in ho$ eectively resources
are !anaged. A variance of the +rst #ind requires very dierent actions fro! a variance of
the second #ind. ,onsequently, these t$o #inds of variances should be clearly separated
fro! each other. -hen the budget is directly co!pared to the actual results, these t$o #inds
of variances are lu!ped together.
9-# An activity variance is the dierence bet$een a revenue or cost ite! in the static
planning budget and the sa!e ite! in the fexible budget. An activity variance is due solely
to the dierence in the level of activity assu!ed in the planning budget and the actual level
of activity used in the fexible budget. ,aution should be exercised in interpreting an activity
variance. The .favorable/ and .unfavorable/ labels are perhaps !isleading for activity
variances that involve costs. A .favorable/ activity variance for a cost occurs because the
cost has so!e variable co!ponent and the actual level of activity is less than the planned
level of activity. An .unfavorable/ activity variance for a cost occurs because the cost has
so!e variable co!ponent and the actual level of activity is greater than the planned level of
activity.
9-$ A revenue variance is the dierence bet$een ho$ !uch 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.
9-% A spending variance is the dierence bet$een ho$ !uch a cost should have been,
given the actual level of activity, and the actual a!ount of the cost. 0i#e the revenue
variance, the interpretation of a spending variance is straight&for$ard. A favorable spending
variance occurs because the cost is lo$er than expected for the actual level of activity. An
9-1
Chapter 09 Flexible Budgets and Performance Analysis
unfavorable spending variance occurs because the cost is higher than expected for the
actual level of activity.
9-2
Chapter 09 Flexible Budgets and Performance Analysis
9-& In a fexible budget perfor!ance report, the static planning budget is not directly
co!pared to actual results. The fexible budget is interposed bet$een the static planning
budget and actual results. The dierences bet$een the static planning budget and the
fexible budget are activity variances. The dierences bet$een the fexible budget and the
actual results are the revenue and spending variances. The fexible budget perfor!ance
report cleanly separates the dierences bet$een the static planning budget and the actual
results that are due to changes in activity 1the activity variances2 fro! the dierences that
are due to changes in prices and the eectiveness $ith $hich resources are !anaged 1the
revenue and spending variances2.
9-9 The only dierence bet$een a fexible budget based on a single cost driver and one
based on t$o cost drivers is the cost for!ulas. -hen t$o cost drivers exist, so!e costs !ay
be a function of the +rst cost driver, so!e costs !ay be a function of the second cost driver,
and so!e costs !ay be a function of both cost drivers.
9-1' -hen the static planning budget is directly co!pared to actual results, it is i!plicitly
assu!ed that costs 1and revenues2 should not change $ith a change in the level of activity.
This assu!ption is valid only for +xed costs. 3o$ever, it is unli#ely that all costs are +xed.
4o!e are li#ely to be variable or !ixed.
9-11 -hen the static planning budget is adjusted proportionately for a change in activity
and then directly co!pared to actual results, it is i!plicitly assu!ed that costs should
change in proportion to a change in the level of activity. This assu!ption is valid only for
strictly variable costs. 3o$ever, it is unli#ely that all costs are strictly variable. 4o!e are
li#ely to be +xed or !ixed.
(xercise 9-1 156 !inutes2
7ator 8ivers
)lexible Budget
)or the (onth 9nded (arch '5
Actual diving&hours................................. 5%6
:evenue 1;'<6.66q2................................ ;=>,>6
6
9xpenses?
-ages and salaries 1;5>,666 @
;5'6.66q2...........................................
'A,=66
4upplies 1;B.66q2.................................. %B6
9quip!ent rental 1;>,B66 @ ;>A.66q2. . =,CC6
Insurance 1;C,>662................................ C,>66
(iscellaneous 1;BC6 @ ;5.B6q2............ <>B
Total expense.......................................... B6,55B
Det operating inco!e.............................. ;>>,6<
B
9-
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9- 156 !inutes2
5. The activity variances are sho$n belo$?
Air (eals
Activity "ariances
)or the (onth 9nded 8ece!ber '5
Plannin
g
Budget
Flexibl
e
Budget
Activity
Varianc
es
(eals...................................... >6,666 >5,666
:evenue 1;'.<6q2...................
;=A,666 ;=%,<66
;',<6
6 )
9xpenses?
:a$ !aterials 1;>.'6q2........ CA,666 C<,'66 >,'66 E
-ages and salaries
1;A,C66 @ ;6.>Bq2.............. 55,C66 55,AB6 >B6 E
Etilities 1;>,566 @ ;6.6Bq2. . . ',566 ',5B6 B6 E
)acility rent 1;',<662............ ',<66 ',<66 6
Insurance 1;>,A662............... >,A66 >,A66 6
(iscellaneous 1;=66 @
;6.56q2.............................. >,=66 >,<66
56
6 E
Total expense..........................
A%,A66 =>,'66
>,=6
6 E
Det operating inco!e.............
; A,C66 ; =,B66
;5,56
6 )
>. (anage!ent should note that the level of activity $as above
$hat had been planned for the !onth. This led to an expected
increase in pro+ts of ;5,566. 3o$ever, the individual ite!s on
the report should not receive !uch !anage!ent attention. The
favorable variance for revenue and the unfavorable variances
for expenses are entirely caused by the increase in activity.
9-!
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-! 15B !inutes2
Fly!pia Bivalve
:evenue and 4pending "ariances
)or the (onth 9nded Guly '5
Flexible
Budget
Actual
Results
Revenu
e and
Spendin
g
Varianc
es
Hounds.................................... =,666 =,666
:evenue 1;C.>6q2................... ;>%,C66 ;><,A66 ; <6
6
E
9xpenses?
Hac#ing supplies 1;6.C6q2..... >,<66 >,%=6 5=6 E
Fyster bed !aintenance
1;',A662.............................
',A66 ',CA6 5C6 )
-ages and salaries
1;>,BC6 @ ;6.B6q2..............
A,6C6 A,CB6 C56 E
4hipping 1;6.=Bq2................. B,>B6 C,%<6 >=6 )
Etilities 1;5,>A62................... 5,>A6 5,6=6 5%6 )
Fther 1;B56 @ ;6.6Bq2......... <A6 5,C<6 A>
6
E
Total expense.......................... 5%,<56 >6,C56 A6
6
E
Det operating inco!e............. ; %,B%6 ; <,5%6 ;5,C6
6
E
9-"
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-" 1>6 !inutes2
5.
(t. 3ood Air
)lexible Budget Herfor!ance :eport
)or the (onth 9nded August '5
Plannin
g
Budget
Activity
Varianc
es
Flexibl
e
Budge
t
Revenue
and
Spendin
g
Variance
s
Actua
l
Result
s
)lights 1q2.................................. B6 B> B>
:evenue 1;'A6.66q2..................
;5<,66
6
;=>6 ) ;5<,=>
6
;5,=C
6
E ;5A,%<
6
9xpenses?
-ages and salaries
1;',<66 @ ;%>.66q2..............
<,C66 5<C E <,B<C CC ) <,BC6
)uel 1;'C.66q2........................ 5,=66 A< E 5,=A< 5A> E 5,%'6
Airport fees 1;<=6 @ ;'B.66q2 >,A>6 =6 E >,A%6 6 >,A%6
Aircraft depreciation 1;55.66q2 BB6 >> E B=> 6 B=>
FIce expenses 1;>'6 @
;5.66q2.................................
><6 > E ><> 5A
<
E CB6
Total expense............................
5',BB6 'CA E 5',<%
A
><
A
E 5C,5<
>
Det operating inco!e................
; C,CB6 ;'=C ) ; C,<>
C
;>,6>
A
E ; >,=%
<
9-#
Chapter 09 Flexible Budgets and Performance Analysis
>. The overall activity variance is ;'=C favorable and is due to an increase in activity. The
;5,=C6 unfavorable revenue variance is very large relative to the co!pany*s net
operating inco!e and should be investigated. -as this due to discounts given or perhaps
a lo$er average nu!ber of passengers
9-$
Chapter 09 Flexible Budgets and Performance Analysis
per fight than usualJ The other variances are relatively s!all, but are $orth so!e
!anage!ent attentionparticularly if they recur next !onth.
9-%
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-# 15B !inutes2
Icicle Bay Tours
Hlanning Budget
)or the (onth 9nded August '5
Budgeted cruises 1q
5
2.................................................. B<
Budgeted passengers 1q
>
2........................................... ',>66
:evenue 1;><.66q
>
2..................................................... ;<%,A6
6
9xpenses?
"essel operating costs 1;A,<66 @ ;C=B.66q
5
@
;'.B6q
>
2.................................................................
CB,BB6
Advertising 1;>,=662................................................. >,=66
Ad!inistrative costs 1;B,<66 @ ;'A.66q
5
@
;5.<6q
>
2.................................................................
5',AC<
Insurance 1;',A662.................................................... ',A66
Total expense.............................................................. AB,C%<
Det operating inco!e.................................................. ;>C,56
>
9-9
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-$ 156 !inutes2
The variance report co!pares the planning budget to actual
results and should not be used to evaluate ho$ $ell costs $ere
controlled during (ay. The planning budget is based on >66 jobs,
but the actual results are for >6< jobs. ,onsequently, the actual
revenues and !any of the actual costs should have been dierent
fro! $hat $as budgeted at the beginning of the period. 8irect
co!parisons of budgeted to actual costs are valid only if the costs
are +xed.
To evaluate ho$ $ell revenues and costs $ere controlled, it is
necessary to esti!ate $hat the revenues and costs should have
been for the actual level of activity using a fexible budget. The
fexible budget a!ounts can then be co!pared to the actual
results to evaluate ho$ $ell revenues and costs $ere controlled.
9-10
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-% 15B !inutes2
The adjusted budget $as created by !ultiplying each ite! in the
budget by the ratio >6<K>66L in other $ords, each ite! $as
adjusted up$ard by CM. This procedure provides valid
bench!ar#s for revenues and for costs that are strictly variable,
but overstates $hat +xed and !ixed costs should be. )ixed costs,
for exa!ple, should not increase at all if the activity level
increases by CMproviding, of course, that this level of activity is
$ithin the relevant range. (ixed costs should increase less than
CM.
To evaluate ho$ $ell revenues and costs $ere controlled, it is
necessary to esti!ate $hat the revenues and costs should have
been for the actual level of activity using a fexible budget that
explicitly recogniNes +xed and !ixed costs. The fexible budget
a!ounts can then be co!pared to the actual results to evaluate
ho$ $ell revenues and costs $ere controlled.
9-11
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-& 1>6 !inutes2
3aroldOs :oof :epair
Activity "ariances
)or the (onth 9nded Gune '6
Planning
Budget
Flexible
Budget
Activity
Variances
:epair&hours 1q2...................... >,B66 >,C66
:evenue 1;C'.B6q2..................
;56<,=B
6 ;56C,C66
;C,'B
6 E
9xpenses?
-ages and salaries
1;>5,'<6 @ ;5B.<6q2.......... A6,<<6 B%,'66 5,B<6 )
Harts and supplies 1;=.B6q2. . 5<,=B6 5<,666 =B6 )
9quip!ent depreciation
1;>,=C6 @ ;6.A6q2.............. C,>C6 C,5<6 A6 )
Truc# operating expenses
1;B,<>6 @ ;5.%6q2.............. 56,B=6 56,'<6 5%6 )
:ent 1;C,AB62........................ C,AB6 C,AB6 6
Ad!inistrative expenses
1;',<=6 @ ;6.=6q2.............. B,A>6 B,BB6 =6 )
Total expense.......................... 56C,=56 56>,6A6 >,AB6 )
Det operating inco!e.............. ; C,6C6 ; >,'C6
;5,=6
6 E
9-12
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-9 15B !inutes2
Auto 0avage
Hlanning Budget
)or the (onth 9nded Fctober '5
Budgeted cars $ashed 1q2....................... <,666
:evenue 1;B.%6q2.................................... ;C=,>6
6
9xpenses?
,leaning supplies 1;6.=6q2................... B,A66
9lectricity 1;5,C66 @ ;6.56q2................ >,>66
(aintenance 1;6.'6q2........................... >,C66
-ages and salaries 1;C,=66 @ ;6.C6q2. =,%66
8epreciation 1;<,'662........................... <,'66
:ent 1;>,5662........................................ >,566
Ad!inistrative expenses 1;5,<66 @
;6.6Bq2...............................................
>,>6
6
Total expense.......................................... '6,=6
6
Det operating inco!e.............................. ;5A,B6
6
9-1
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1' 15B !inutes2
Auto 0avage
)lexible Budget
)or the (onth 9nded Fctober '5
Actual cars $ashed 1q2............................ <,566
:evenue 1;B.%6q2.................................... ;C=,=%
6
9xpenses?
,leaning supplies 1;6.=6q2................... B,A=6
9lectricity 1;5,C66 @ ;6.56q2................ >,>56
(aintenance 1;6.'6q2........................... >,C'6
-ages and salaries 1;C,=66 @ ;6.C6q2. =,%C6
8epreciation 1;<,'662........................... <,'66
:ent 1;>,5662........................................ >,566
Ad!inistrative expenses 1;5,<66 @
;6.6Bq2...............................................
>,>6
B
Total expense.......................................... '6,<B
B
Det operating inco!e.............................. ;5A,%'
B
9-1!
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-11 1>6 !inutes2
Auto 0avage
Activity "ariances
)or the (onth 9nded Fctober '5
Planni
ng
Budget
Flexible
Budget
Activity
Variance
s
,ars $ashed 1q2.......................... <,666 <,566
:evenue 1;B.%6q2........................
;C=,>6
6 ;C=,=%6
;B%
6 )
9xpenses?
,leaning supplies 1;6.=6q2....... B,A66 B,A=6 =6 E
9lectricity 1;5,C66 @ ;6.56q2.... >,>66 >,>56 56 E
(aintenance 1;6.'6q2............... >,C66 >,C'6 '6 E
-ages and salaries
1;C,=66 @ ;6.C6q2.................. =,%66 =,%C6 C6 E
8epreciation 1;<,'662............... <,'66 <,'66 6
:ent 1;>,5662............................ >,566 >,566 6
Ad!inistrative expenses
1;5,<66 @ ;6.6Bq2.................. >,>66 >,>6B B E
Total expense.............................. '6,=66 '6,<BB 5BB E
Det operating inco!e..................
;5A,B6
6 ;5A,%'B
;C'
B )
9-1"
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1 1>6 !inutes2
Auto 0avage
:evenue and 4pending "ariances
)or the (onth 9nded Fctober '5
Flexibl
e
Budget
Actual
Results
Revenue
and
Spending
Variances
,ars $ashed 1q2...................... <,566 <,566
:evenue 1;B.%6q2....................
;C=,=%
6 ;C%,'66
;5,B5
6 )
9xpenses?
,leaning supplies 1;6.=6q2. . . B,A=6 A,566 C'6 E
9lectricity 1;5,C66 @
;6.56q2............................... >,>56 >,5=6 C6 )
(aintenance 1;6.'6q2........... >,C'6 >,AC6 >56 E
-ages and salaries
1;C,=66 @ ;6.C6q2.............. =,%C6 <,>A6 '>6 E
8epreciation 1;<,'662........... <,'66 <,'66 6
:ent 1;>,5662........................ >,566 >,'66 >66 E
Ad!inistrative expenses
1;5,<66 @ ;6.6Bq2.............. >,>6B >,566
56
B )
Total expense.......................... '6,<BB '5,<=6
5,65
B E
Det operating inco!e..............
;5A,%'
B ;5=,C'6
; C%
B )
9-1#
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1! 1'6 !inutes2
Auto 0avage
)lexible Budget Herfor!ance :eport
)or the (onth 9nded Fctober '5
Plannin
g
Budget
Activity
Variance
s
Flexibl
e
Budget
Revenue
and
Spending
Variance
s
Actual
Results
,ars $ashed 1q2.............................. <,666 <,566 <,566
:evenue 1;B.%6q2............................ ;C=,>66 ;B%6 )
;C=,=%
6
;5,B5
6 )
;C%,'6
6
9xpenses?
,leaning supplies 1;6.=6q2........... B,A66 =6 E B,A=6 C'6 E A,566
9lectricity 1;5,C66 @ ;6.56q2........ >,>66 56 E >,>56 C6 ) >,5=6
(aintenance 1;6.'6q2................... >,C66 '6 E >,C'6 >56 E >,AC6
-ages and salaries
1;C,=66 @ ;6.C6q2...................... =,%66 C6 E =,%C6 '>6 E <,>A6
8epreciation 1;<,'662................... <,'66 6 <,'66 6 <,'66
:ent 1;>,5662................................ >,566 6 >,566 >66 E >,'66
Ad!inistrative expenses
1;5,<66 @ ;6.6Bq2...................... >,>66 B E >,>6B
56
B ) >,566
Total expense.................................. '6,=66 5BB E '6,<BB
5,65
B E '5,<=6
Det operating inco!e...................... ;5A,B66 ;C'B )
;5A,%'
B
; C%
B )
;5=,C'
6
9-1$
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1" 156 !inutes2
Hierr (anufacturing Inc.
Hlanning Budget for (anufacturing ,osts
)or the (onth 9nded Guly '5
Budgeted !achine&hours 1q2... C,666
8irect !aterials 1;B.=6q2........ ;>>,<6
6
8irect labor 1;C>,<662............. C>,<66
4upplies 1;6.>6q2.................... <66
Etilities 1;5,A66 @ ;6.5Bq2...... >,>66
8epreciation 1;5C,%662........... 5C,%66
Insurance 1;55,C662................ 55,C66
Total !anufacturing cost......... ;%C,%6
6
9-1%
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1# 1CB !inutes2
5. The variance report should not be used to evaluate ho$ $ell
costs $ere controlled. In August, the planning budget $as
based on >66 lessons, but the actual results are for >56 jobs
an increase of BM over budget. ,onsequently, the actual
revenues and !any of the actual costs should have been
dierent fro! $hat $as budgeted at the beginning of the
period. )or exa!ple, instructor $ages, a variable cost, should
have increased by BM because of the increase in activity, but
the variance report assu!es that they should not have
increased at all. This results in a spurious unfavorable variance
for instructor $ages. 8irect co!parisons of budgeted to actual
costs are valid only if the costs are +xed.
>. 4ee the follo$ing page.
'. The overall activity variance for net operating inco!e $as ;A=6
) 1favorable2. That !eans that as a consequence of the
increase in activity fro! >66 lessons to >56 lessons, the net
operating inco!e should have been up ;A=6 over budget.
3o$ever, it $asn*t. The budgeted net operating inco!e $as
;A,<<6 and the actual net operating inco!e $as ;=,556, so the
pro+t $as up by only ;>'6not ;A=6 as it should have been.
There are !any reasons for thisas sho$n in the revenue and
spending variances. Herhaps !ost i!portantly, fuel costs $ere
!uch higher than expected. The spending variance for fuel $as
;=C6 E 1unfavorable2 and !ay have been due to an increase in
the price of fuel that is beyond the o$nerK!anager*s control.
(ost of the other revenue spending variances $ere favorable
or s!all, so $ith the exception of this ite!, costs see! to have
been adequately controlled.
9-19
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-1# 1continued2
-ings )light 4chool
)lexible Budget Herfor!ance :eport
)or the (onth 9nded August '5
Planni
ng
Budget
Activity
Variances
Flexibl
e
Budget
Revenue
and
Spendin
g
Variance
s
Actual
Results
0essons 1q2.................................. >66 >56 >56
:evenue 1;>>Bq2.........................
;CB,66
6
;>,>B6 ) ;C=,>B
6
; B6 ) ;C=,'6
6
9xpenses?
Instructor $ages1;A>q2............. 5>,C66 A>6 E 5',6>6 556 ) 5>,%56
Aircraft depreciation 1;B=q2...... 55,C66 B=6 E 55,%=6 6 55,%=6
)uel 1;>5q2............................... C,>66 >56 E C,C56 =C6 E B,5B6
(aintenance 1;A=6 @ ;5'q2..... ',>=6 5'6 E ',C66 =6 E ',C=6
7round facility expenses
1;5,AC6 @ ;Cq2.......................
>,CC6 C6 E >,C<6 5'6 ) >,'B6
Ad!inistration 1;C,>56 @ ;5q2.. C,C56 56 E C,C>6 <6 ) C,'C6
Total expense.............................. '<,5>6 5,B<6 E '%,=66 C%6 E C6,5%6
Det operating inco!e.................. ; A,<<6 ; A=6 ) ; =,BB6 ;CC6 E ; =,556
9-20
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1$ 1CB !inutes2
5. The planning budget based on C courses and A6 students
appears belo$?
Toque ,oo#ing Acade!y
Hlanning Budget
)or the (onth 9nded Fctober '5
Budgeted courses 1q
5
2........................................ C
Budgeted students 1q
>
2...................................... A6
:evenue 1;<B6q
>
2.............................................. ;B5,66
6
9xpenses?
Instructor $ages 1;>,%<6q
5
2............................ 55,%>6
,lassroo! supplies 1;'56q
>
2........................... 5<,A66
Etilities 1;5,>'6 @ ;<Bq
5
2................................ 5,B=6
,a!pus rent 1;B,5662...................................... B,566
Insurance 1;>,'C62.......................................... >,'C6
Ad!inistrative expenses 1;',%C6 @ ;CAq
5
@
;=q
>
2.............................................................
C,BC
C
Total expense..................................................... CC,6=
C
Det operating inco!e........................................ ; A,%>
A
>. The fexible budget based on C courses and B< students
appears belo$?
Toque ,oo#ing Acade!y
)lexible Budget
)or the (onth 9nded Fctober '5
Actual courses 1q
5
2............................................. C
Actual students 1q
>
2............................................ B<
:evenue 1;<B6q
>
2.............................................. ;C%,'6
6
9xpenses?
Instructor $ages 1;>,%<6q
5
2............................ 55,%>6
,lassroo! supplies 1;'56q
>
2........................... 5=,%<6
Etilities 1;5,>'6 @ ;<Bq
5
2................................ 5,B=6
,a!pus rent 1;B,5662...................................... B,566
9-21
Chapter 09 Flexible Budgets and Performance Analysis
Insurance 1;>,'C62.......................................... >,'C6
Ad!inistrative expenses 1;',%C6 @ ;CAq
5
@
;=q
>
2.............................................................
C,B'
6
Total expense..................................................... C',CC
6
Det operating inco!e........................................ ; B,<A
6
9-22
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1$ 1continued2
'. The fexible budget perfor!ance report for Fctober appears belo$?
Toque ,oo#ing Acade!y
)lexible Budget Herfor!ance :eport
)or the (onth 9nded Fctober '5
Plannin
g
Budget
Activity
Variance
s
Flexibl
e
Budge
t
Revenue
and
Spending
Variances
Actual
Results
,ourses 1q52............................ C C C
4tudents 1q>2........................... A6 B< B<
:evenue 1;<B6q
>
2....................
;B5,66
6
;5,=6
6 E
;C%,'6
6
;5,>6
6 E
;C<,56
6
9xpenses?
Instructor $ages 1;>,%<6q
5
2. . 55,%>6 6 55,%>6 =>6 ) 55,>66
,lassroo! supplies 1;'56q
>
2. 5<,A66 A>6 ) 5=,%<6 C=6 E 5<,CB6
Etilities 1;5,>'6 @ ;<Bq
5
2...... 5,B=6 6 5,B=6 C56 E 5,%<6
,a!pus rent 1;B,5662............ B,566 6 B,566 6 B,566
Insurance 1;>,'C62................ >,'C6 6 >,'C6 5C6 E >,C<6
Ad!inistrative expenses
1;',%C6 @ ;CAq
5
@;=q
>
2...... C,BCC 5C )
C,B'
6 BA6 ) ',%=6
Total expense........................... CC,6=C A'C )
C',CC
6 >A6 ) C',5<6
Det operating inco!e.............. ; A,%>A
;5,6A
A E
; B,<A
6 ; %C6 E ; C,%>6
9-2
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1% 1>6 !inutes2
7elato 4upre!o
:evenue and 4pending "ariances
)or the (onth 9nded Guly '5
Flexible
Budget
Actual
Results
Revenue
and
Spending
Variances
0iters 1q2................................. C,%66 C,%66
:evenue 1;5'.B6q2..................
;AA,5B6 ;A%,C>
6
;',>=6 )
9xpenses?
:a$ !aterials 1;B.56q2......... >C,%%6 >A,<%6 5,%66 E
-ages 1;C,<66 @ ;5.>6q2..... 56,A<6 55,>66 B>6 E
Etilities 1;5,<A6 @ ;6.5Bq2.... >,B%B >,C=6 5>B )
:ent 1;',5B62........................ ',5B6 ',5B6 6
Insurance1;5,<%62................. 5,<%6 5,<%6 6
(iscellaneous 1;BC6 @
;6.5Bq2...............................
5,>=B 5,'%6 55B E
Total expense.......................... CC,B<6 CA,%%6 >,C56 E
Det operating inco!e..............
;>5,B=6 ;>>,C'
6
; <A6 )
9-2!
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-1& 1'6 !inutes2
AirAssurance ,orporation
)lexible Budget Herfor!ance :eport
)or the (onth 9nded (arch '5
Plannin
g
Budget
Activity
Varianc
es
Flexibl
e
Budget
Revenue
and
Spendin
g
Variance
s
Actual
Results
Gobs 1q2............................................ 566 %< %<
:evenue 1;>=B.66q2........................ ;>=,B66 ;BB6 E ;>A,%B6
;>,>6
6 E ;>C,=B6
9xpenses?
Technician $ages 1;<,A662............ <,A66 6 <,A66 5B6 ) <,CB6
(obile lab operating expenses
1;C,%66 @ ;>%.66q2.................... =,<66 B< ) =,=C> >5< E =,%A6
FIce expenses 1;>,=66 @
;'.66q2....................................... ',666 A ) >,%%C 5CC ) >,<B6
Advertising expenses 1;5,B<62..... 5,B<6 6 5,B<6 =6 E 5,AB6
Insurance 1;>,<=62........................ >,<=6 6 >,<=6 6 >,<=6
(iscellaneous expenses
1;%A6 @ ;>.66q2......................... 5,5A6 C ) 5,5BA A%5 ) CAB
Total expense.................................. >B,656 A< ) >C,%C> A%= ) >C,>CB
Det operating inco!e...................... ; >,C%6 ;C<> E ; >,66<
;5,B6
' E ; B6B
9-2"
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-19 1CB !inutes2
5. The planning budget appears belo$. Dote that the report does
not include revenue or net operating inco!e because the
production depart!ent is a cost center that does not have any
revenue.
Tri$ay Hac#aging ,orporation
Hroduction 8epart!ent Hlanning Budget
)or the (onth 9nded Dove!ber '6
Budgeted labor&hours 1q2....................... C,666
8irect labor 1;5A.'6q2............................ ; AB,>66
Indirect labor 1;C,'66 @ ;5.<6q2............ 55,B66
Etilities 1;B,A66 @ ;6.=6q2..................... <,C66
4upplies 1;5,C66 @ ;6.'6q2................... >,A66
9quip!ent depreciation 1;5<,A66 @
;>.<6q2................................................
>%,<66
)actory rent 1;<,'662............................. <,'66
Hroperty taxes 1;>,<662......................... >,<66
)actory ad!inistration 1;5',C66 @
;6.%6q2................................................
5=,666
Total expense......................................... ;5CB,A6
6
>. The fexible budget appears belo$. 0i#e the planning budget,
this report does not include revenue or net operating inco!e
because the production depart!ent is a cost center that does
not have any revenue.
Tri$ay Hac#aging ,orporation
Hroduction 8epart!ent )lexible Budget
)or the (onth 9nded Dove!ber '6
Actual labor&hours 1q2............................. ',<66
8irect labor 1;5A.'6q2............................ ; A5,%C
6
Indirect labor 1;C,'66 @ ;5.<6q2............ 55,5C6
Etilities 1;B,A66 @ ;6.=6q2..................... <,>A6
4upplies 1;5,C66 @ ;6.'6q2................... >,BC6
9quip!ent depreciation 1;5<,A66 @ >%,>C6
9-2#
Chapter 09 Flexible Budgets and Performance Analysis
;>.<6q2................................................
)actory rent 1;<,'662............................. <,'66
Hroperty taxes 1;>,<662......................... >,<66
)actory ad!inistration 1;5',C66 @
;6.%6q2................................................
5A,<>
6
Total expense......................................... ;5C5,6C
6
9-2$
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-19 1continued2
'. The fexible budget perfor!ance report appears belo$. This report does not include
revenue or net operating inco!e because the production depart!ent is a cost center
that does not have any revenue.
Tri$ay Hac#aging ,orporation
Hroduction 8epart!ent )lexible Budget Herfor!ance :eport
)or the (onth 9nded Dove!ber '6
Plannin
g
Budget
Activity
Variance
s
Flexible
Budget
Spendin
g
Variance
s
Actual
Results
0abor&hours 1q2........................... C,666 ',<66 ',<66
8irect labor 1;5A.'6q2................
; AB,>6
6
;',>A
6 ) ; A5,%C6
;5,B<
6 E
; A',B>
6
Indirect labor 1;C,'66 @
;5.<6q2.................................... 55,B66 'A6 ) 55,5C6 CA6 ) 56,A<6
Etilities 1;B,A66 @ ;6.=6q2......... <,C66 5C6 ) <,>A6 B'6 E <,=%6
4upplies 1;5,C66 @ ;6.'6q2........ >,A66 A6 ) >,BC6 >=6 E >,<56
9quip!ent depreciation
1;5<,A66 @ ;>.<6q2.................. >%,<66 BA6 ) >%,>C6 6 >%,>C6
)actory rent 1;<,'662.................. <,'66 6 <,'66 C66 E <,=66
Hroperty taxes 1;>,<662.............. >,<66 6 >,<66 6 >,<66
)actory ad!inistration
1;5',C66 @ ;6.%6q2..................
5=,66
6 5<6 ) 5A,<>6 B%6 )
5A,>'
6
Total expense..............................
;5CB,A6
6
;C,BA
6 )
;5C5,6C
6
;5,='
6 E
;5C>,==
6
9-2%
Chapter 09 Flexible Budgets and Performance Analysis
9-29
Chapter 09 Flexible Budgets and Performance Analysis
(xercise 9-19 1continued2
C. The overall favorable activity variance of ;C,BA6 occurred because the actual level of
activity $as less than the budgeted level of activity. Because of this decreased level of
activity, so!e of the costs should have been lo$er than budgeted. ,onsequently, calling
this a favorable variance is a bit !isleading. Fn the other hand, the overall unfavorable
spending variance of ;5,='6 !ay be of concern to !anage!ent. -hy did the
unfavorableand favorablevariances occurJ 9ven the relatively s!all unfavorable
spending variance for supplies of ;>=6 should probably be investigated because, as a
percentage of $hat the cost should have been 1;>=6K;>,BC6 P 56.=M2, this variance is
fairly large.
9-0
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-' 1'6 !inutes2
5. The activity variances are sho$n belo$?
4ecuri8oor ,orporation
Activity "ariances
)or the (onth 9nded April '6
Plannin
g
Budget
Flexibl
e
Budget
Activity
Variances
(achine&hours 1q2..................... >6,666 5<,666
Etilities 1;5A,B66 @ ;6.5Bq2...... ; 5%,B6
6
; 5%,>6
6
; '66 )
(aintenance 1;'<,A66 @
;5.<6q2...................................
=C,A66 =5,666 ',A66 )
4upplies 1;6.B6q2...................... 56,666 %,666 5,666 )
Indirect labor 1;%C,'66 @
;5.>6q2...................................
55<,'66 55B,%66 >,C66 )
8epreciation 1;A<,6662............. A<,66
6
A<,66
6
6
Total.......................................... ;>%6,C6
6
;><',56
6
;=,'66 )
The activity variances are all favorable because the actual activity $as less than the
planned activity and therefore all of the variable costs should be lo$er than planned in
the original budget.
9-1
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-' 1continued2
>. The spending variances are co!puted belo$?
4ecuri8oor ,orporation
4pending "ariances
)or the (onth 9nded April '6
Flexible
Budget
Actual
Results
Spending
Variances
(achine&hours 1q2..................... 5<,666 5<,666
Etilities 1;5A,B66 @ ;6.5Bq2...... ; 5%,>6
6
; >5,'6
6
;>,566 E
(aintenance 1;'<,A66 @
;5.<6q2...................................
=5,666 A<,C66 >,A66 )
4upplies 1;6.B6q2...................... %,666 %,<66 <66 E
Indirect labor 1;%C,'66 @
;5.>6q2...................................
55B,%66 55%,>66 ','66 E
8epreciation 1;A<,6662............. A<,66
6
A%,=6
6
5,=66 E
Total.......................................... ;><',56
6
;><<,C6
6
;B,'66 E
An unfavorable spending variance !eans that the actual cost $as greater than $hat the
cost should have been for the actual level of activity. A favorable spending variance
!eans that the actual cost $as less than $hat the cost should have been for the actual
level of activity. -hile this !a#es intuitive sense, so!eti!es a favorable variance !ay
not be good. )or exa!ple, the rather large favorable variance for !aintenance !ight
have resulted fro! s#i!ping on !aintenance. 4ince these variances are all fairly large,
9-2
Chapter 09 Flexible Budgets and Performance Analysis
they should all probably be investigated.
9-
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-1 1'6 !inutes2
5.
"erona HiNNa
)lexible Budget Herfor!ance :eport
)or the (onth 9nded Fctober '5
Plannin
g
Budget
Activity
Variance
s
Flexibl
e
Budget
Spendin
g
Variance
s
Actual
Results
HiNNas 1q
5
2.................................. 5,B66 5,A66 5,A66
8eliveries 1q
>
2............................ >66 5<6 5<6
:evenue 1;5'.66q
5
2................... ;5%,B6
6
;5,'6
6
) ;>6,<6
6
;BC6 ) ;>5,'C
6
9xpenses?
HiNNa ingredients 1;C.>6q
5
2...... A,'66 C>6 E A,=>6 5'6 E A,<B6
Qitchen sta 1;B,<=62.............. B,<=6 6 B,<=6 A6 ) B,<56
Etilities 1;B%6 @ ;6.56q
5
2........ =C6 56 E =B6 5>B E <=B
8elivery person 1;>.%6q
>
2........ B<6 B< ) B>> 6 B>>
8elivery vehicle 1;A56 @
;5.'6q
>
2................................
<=6 >A ) <CC 5'< E %<>
9quip!ent depreciation
1;'<C2...................................
'<C 6 '<C 6 '<C
:ent 1;5,=%62.......................... 5,=%6 6 5,=%6 6 5,=%6
(iscellaneous 1;=56 @
;6.6Bq
5
2................................
=<B B E =%6 5> ) ==<
Total expense............................. 5=,'5% 'B5 E 5=,A=6 '>5 E 5=,%%5
Det operating inco!e................ ; >,5<5 ; %C% ) ; ',5'6 ;>5% ) ; ','C%
9-!
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-1 1continued2
>. 4o!e of the activity variances are favorable and so!e are unfavorable. This occurs
because there are t$o cost drivers 1i.e., !easures of activity2 and one is up and the
other is do$n. The actual nu!ber of piNNas delivered is greater than budgeted, so the
activity variance for revenue is favorable, but the activity variances for piNNa ingredients,
utilities, and !iscellaneous are unfavorable. In contrast, the actual nu!ber of deliveries
is less than budgeted, so the activity variances for the delivery person and the delivery
vehicle are favorable.
9-"
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9- 1'6 !inutes2
5. Herfor!ance should be evaluated using a fexible budget perfor!ance report. In this
case, the report $ill not include revenues.
Q7" Blood Ban#
)lexible Budget Herfor!ance :eport
)or the (onth 9nded 4epte!ber '6
Planni
ng
Budget
Activity
Varianc
es
Flexibl
e
Budget
Spendin
g
Variance
s
Actual
Result
s
0iters of blood collected 1q2........... A66 =<6 =<6
(edical supplies 1;55.<Bq2............
; =,556 ;>,5'
'
E ; %,>C' ; % E ; %,>B
>
0ab tests 1;5C.'Bq2....................... <,A56 >,B<' E 55,5%' C55 ) 56,=<>
9quip!ent depreciation 1;5,%662. . 5,%66 6 5,%66 >66 E >,566
:ent 1;5,B662................................ 5,B66 6 5,B66 6 5,B66
Etilities 1;'662.............................. '66 6 '66 >C E '>C
Ad!inistration 1;5',>66 @
;5.<Bq2.......................................
5C,'56 ''' E 5C,AC' A< ) 5C,B=
B
Total expense................................
;'',='
6
;B,6C
%
E ;'<,==
%
;>CA ) ;'<,B'
'
>. The overall unfavorable activity variance of ;B,6C% $as caused by the '6M increase in
activity. There is no reason to investigate this particular variance. The overall spending
variance is ;>CA ), $hich $ould see! to indicate that costs $ere $ell&controlled.
3o$ever, the favorable ;C55 spending variance for lab tests is curious. The fact that this
9-#
Chapter 09 Flexible Budgets and Performance Analysis
variance is favorable indicates that less $as spent on lab tests than should have been
spent according to the cost for!ula. -hyJ 8id the blood ban# get a substantial discount
on the lab testsJ 8id the blood ban# s#i!p on lab testsJ If so, $as this $iseJ In addition,
the unfavorable spending variance of ;>66 for equip!ent depreciation requires so!e
explanation. -as !ore equip!ent obtained to collect the additional bloodJ
9-$
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-! 1CB !inutes2
5. The cost reports are of little use for assessing ho$ $ell costs
$ere controlled. The proble! is that the co!pany is co!paring
budgeted costs at one level of activity to actual costs at
another level of activity. ,osts that are variable $ill naturally be
dierent at these t$o dierent levels of activity. Although the
cost reports do a good job of sho$ing $hether +xed costs $ere
controlled, they do not do a good job of sho$ing $hether
variable costs $ere controlled. 4ince sales have chronically
failed to !eet budget, the level of activity in the factory is also
li#ely to have chronically been belo$ budget. ,onsequently, the
variances for variable costs have li#ely been favorable si!ply
because activity has been less than budgeted in the production
depart!ents. Do $onder the production supervisors have been
pleased $ith the reports.
>. The co!pany should use a fexible budget approach to
evaluate cost control. Ender the fexible budget approach, the
actual costs incurred in $or#ing >B,666 !achine&hours are
co!pared to $hat the costs should have been for that level of
activity.
'. 4ee the follo$ing page.
C. The fexible budget perfor!ance report provides a !uch
clearer picture of the perfor!ance of the Asse!bly 8epart!ent
than the original cost control report prepared by the co!pany.
The overall activity variance is ;5>,>B6 ) 1favorable2 $hich
si!ply refects the fact that the actual level of activity $as
signi+cantly less than the budgeted level of activity. The
variable costs $ould naturally be less than budgeted.
The spending variances indicate that costs $ere not
controlled by the Asse!bly 8epart!ent. -ith the sole
exception of equip!ent depreciation, all of the costs have large
unfavorable spending variances.
9-%
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-! 1continued2
'.
Asse!bly 8epart!ent
)lexible Budget Herfor!ance :eport
)or the (onth 9nded (arch '5
Plannin
g
Budget
Activity
Variances
Flexible
Budget
Spendin
g
Variance
s
Actual
Results
(achine&hours 1q2...................... '6,666 >B,666 >B,666
4upplies 1;6.>6q2R.....................
; A,66
6
; 5,66
6
) ; B,666 ; C66 E ; B,C6
6
4crap 1;6.B6q2R.......................... 5B,666 >,B66 ) 5>,B66 5,B66 E 5C,666
Indirect !aterials 1;5.=Bq2R....... B>,B66 <,=B6 ) C',=B6 ',>B6 E C=,666
-ages and salaries 1;A6,6662.... A6,666 6 A6,666 5,%66 E A5,%66
9quip!ent depreciation
1;%6,6662.................................
%6,66
6
6 %6,666 6 %6,666
Total...........................................
;>>',B6
6
;5>,>B
6
) ;>55,>B
6
;=,6B
6
E ;>5<,'6
6
RThe variable cost per !achine&hour is obtained by dividing the total variable cost fro!
the planning budget by '6,666 !achine&hours.
9-9
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-" 1CB !inutes2
5. The cost control report co!pares the planning budget, $hich
$as prepared for C6,666 !achine&hours, to actual results for
C>,666 !achine&hours. This is li#e co!paring apples to
oranges. ,osts that are variable or !ixed should be higher
$hen the activity level is C>,666 rather than C6,666 !achine&
hours. 8irect co!parisons of budgeted to actual costs are valid
only if the costs are +xed. The cost control report prepared by
the co!pany should not be used to evaluate ho$ $ell costs
$ere controlled.
9-!0
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-" 1continued2
>. A report that $ould be helpful in assessing ho$ $ell costs $ere controlled appears
belo$?
Qara#i ,orporation(achining 8epart!ent
)lexible Budget Herfor!ance :eport
)or the (onth 9nded Gune '6
Plannin
g
Budget
Activity
Variances
Flexible
Budget
Spending
Variance
s
Actual
Results
(achine&hours 1q2................... C6,666 C>,666 C>,666
8irect labor $ages 1;5.=Bq2....
; =6,66
6
;',B66 E ; =',B6
6
;>,56
6
) ; =5,C6
6
4upplies 1;6.B6q2.................... >6,666 5,666 E >5,666 '66 E >5,'66
(aintenance 1;5>,566 @
;6.>6q2.................................
>6,566 C66 E >6,B66 C66 ) >6,566
Etilities 1;5>,<66 @ ;6.5Bq2.... 5<,<66 '66 E 5%,566 566 ) 5%,666
4upervision 1;C5,6662............. C5,666 6 C5,666 6 C5,666
8epreciation 1;A=,6662...........
A=,66
6
6 A=,66
6

6
A=,66
6
Total........................................
;>'A,%6
6
;B,>66 E ;>C>,56
6
;>,'6
6
) ;>'%,<6
6
Dote that in this ne$ report the overall spending variance is favorableindicating that
costs $ere !ost li#ely under control.
9-!1
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-# 1CB !inutes2
5. The report prepared by the boo##eeper co!pares average
budgeted per unit revenues and costs to average actual per
unit revenues and costs. This approach i!plicitly assu!es that
all costs are strictly variableL only variable costs should be
constant on a per unit basis. The average +xed cost should
decrease as the level of activity increases and should increase
as the level of activity decreases. In this case, the actual level
of activity $as greater than the budgeted level of activity. As a
consequence, the average cost per unit for any cost that is
+xed or !ixed 1such as oIce expenses, equip!ent
depreciation, rent, and insurance2 should decline and sho$ a
favorable variance. This !a#es it diIcult to interpret the
variance for a !ixed or +xed cost. )or exa!ple, $as the
favorable ;5B variance per exchange for rent due si!ply to the
increased volu!e or did the co!pany actually save any !oney
on its rentJ Because of this a!biguity, the report prepared by
the boo##eeper is not as useful as a perfor!ance report
prepared using a fexible budget.
>. A fexible budget perfor!ance report $ould be !uch !ore
helpful in assessing the perfor!ance of the co!pany than the
report prepared by the boo##eeper. To construct such a report,
$e +rst need to deter!ine the cost for!ulas as follo$s, $here
q is the nu!ber of exchanges co!pleted?
:evenue....................... ;BB6q The revenue all
co!es fro! fees.
0egal and search fees. . ;5BBq "ariable cost
FIce expenses............ ;C,566 @
;Cq
;C,566 is +xedL
;C P 1;>6% S >6 T
;C,5662K>6
9quip!ent
depreciation..............
;A66 ;A66 P ;'6 S >6
:ent............................. ;5,B66 ;5,B66 P ;=B S >6
Insurance..................... ;'66 ;'66 P ;5B S >6
9-!2
Chapter 09 Flexible Budgets and Performance Analysis
Problem 9-# 1continued2
)acilitator ,orp
)lexible Budget Herfor!ance :eport
)or the (onth 9nded (ay '5
Plannin
g
Budget
Activity
Variances
Flexible
Budget
Spending
Variance
s
Actual
Results
9xchanges co!pleted 1q2........ >6 >B >B
:evenue 1;BB6q2..................... ;55,666 ;>,=B6 ) ;5',=B6 ;5,>B
6
E ;5>,B66
9xpenses?
0egal and search fees
1;5BBq2..............................
',566 ==B E ',<=B 5B6 E C,6>B
FIce expenses
1;C,566 @ ;Cq2...................
C,5<6 >6 E C,>66 566 E C,'66
9quip!ent depreciation
1;A662................................
A66 6 A66 6 A66
:ent 1;5,B662........................ 5,B66 6 5,B66 6 5,B66
Insurance 1;'662................... '66 6 '66 6 '66
Total expense.......................... %,A<6 =%B E 56,C=B >B
6
E 56,=>B
Det operating inco!e.............. ; 5,'>6 ;5,%BB ) ; ',>=B ;5,B6
6
E ; 5,==B
'. Fn the one hand, the increase in the nu!ber of exchanges co!pleted $as positive. The
overall favorable activity of ;5,%BB indicates that the net operating inco!e should have
increased by that a!ount because of the increase in activity. 3o$ever, the net operating
9-!
Chapter 09 Flexible Budgets and Performance Analysis
inco!e did not actually increase by nearly that !uch. This $as due to the unfavorable
revenue variance and a nu!ber of unfavorable spending variances, all of $hich should
be investigated by the o$ner.
9-!!
Chapter 09 Flexible Budgets and Performance Analysis
Case 9-$ 1'6 !inutes2
It is diIcult to i!agine ho$ 0ance Hrating could ethically agree to
go along $ith reporting the favorable ;A,666 variance for
industrial engineering on the +nal report, even if the bill $ere not
actually received by the end of the year. It $ould be !isleading to
exclude part of the +nal cost of the contract. ,ollaborating in this
atte!pt to !islead corporate headquarters violates the credibility
standard in the 4tate!ent of 9thical Hrofessional Hractice
pro!ulgated by the Institute of (anage!ent Accountants. The
credibility standard requires that !anage!ent accountants
.disclose all relevant infor!ation that could reasonably be
expected to infuence an intended userOs understanding of the
reports, analyses, or reco!!endations./ )ailing to disclose the
entire a!ount o$ed on the industrial engineering contract
violates this standard.
Individuals $ill dier in ho$ they thin# Hrating should handle this
situation. In our opinion, he should +r!ly state that he is $illing to
call (aria, but even if the bill does not arrive, he is ethically
bound to properly accrue the expenses on the report$hich $ill
!ean an unfavorable variance for industrial engineering and an
overall unfavorable variance. This $ould require a great deal of
personal courage. If the general !anager insists on #eeping the
!isleading ;A,666 favorable variance on the report, Hrating $ould
have little choice except to ta#e the dispute to the next higher
!anagerial level in the co!pany.
It is i!portant to note that the proble! !ay be a consequence of
inappropriate use of perfor!ance reports by corporate
headquarters. If the perfor!ance report is being used as a $ay of
.beating up/ !anagers, corporate headquarters !ay be creating
a cli!ate in $hich !anagers such as the general !anager at the
,olorado 4prings plant $ill feel li#e they !ust al$ays turn in
positive reports. This creates pressure to bend the truth since
reality isn*t al$ays positive.
9-!"
Chapter 09 Flexible Budgets and Performance Analysis
Case 9-% 1CB !inutes2
5. The fexible budget can be prepared using the follo$ing cost
for!ulas?
o 7asoline? ;6.5A per !ile. 7iven.
o Fil, !inor repairs, parts? ;6.6B per !ile. 7iven
o Futside repairs? ;C6 per auto per !onth. ;C6 P ;C<6K5>
o Insurance? ;=B per auto per !onth. ;=B P ;%66K5>
o 4alaries and bene+ts? ;<,A56 per !onth. 7iven
o "ehicle depreciation? ;>66 per auto per !onth. ;>66 P
;>,C66K5>
)arrar Eniversity (otor Hool
4pending "ariances
)or the (onth 9nded (arch '5
Flexibl
e
Budget
Actual
Result
s
Spendin
g
Variance
s
(iles 1q
5
2.................................... B<,666 B<,666
Autos 1q
>
2.................................... >5 >5
7asoline 1;6.5Aq
5
2......................
; %,><6 ; <,%=
6
;'56 )
Fil, !inor repairs, parts
1;6.6Bq
5
2..................................
>,%66 >,<C6 A6 )
Futside repairs 1;C6q
>
2............... <C6 %<6 5C6 E
Insurance 1;=Bq
>
2....................... 5,B=B 5,A>B B6 E
4alaries and bene+ts 1;<,A562.... <,A56 <,A56 6
"ehicle depreciation 1;>66q
>
2.....
C,>66 C,>6
6
6
Total............................................
;>=,C6
B
;>=,>>
B
;5<6 )
>. The original report is based on a static budget approach that
does not allo$ for variations in the nu!ber of !iles driven fro!
!onth to !onth, or for variations in the nu!ber of auto!obiles
used. As a result, the .!onthly budget/ +gures are unrealistic
bench!ar#s. )or exa!ple, actual variable costs such as
gasoline can*t be co!pared to the .budgeted/ cost, because
9-!#
Chapter 09 Flexible Budgets and Performance Analysis
the !onthly budget is based on only B6,666 !iles rather than
the B<,666 !iles actually driven during the !onth.
The perfor!ance report in part 152 above is !ore realistic
because the fexible budget bench!ar# is based on the actual
!iles driven and on the actual nu!ber of auto!obiles used
during the !onth.
9-!$
Chapter 09 Flexible Budgets and Performance Analysis
Case 9-& 1=B !inutes2
5. The cost for!ulas for The (unch#in Theater appear belo$,
$here q
5
is the nu!ber of productions and q
>
is the nu!ber of
perfor!ances?
o Actors* and directors* $ages? ;>,C66q
>
. "ariable $ith respect
to the nu!ber of perfor!ances. ;>,C66 P ;5CC,666 U A6.
o 4tagehands* $ages? ;CB6q
>
. "ariable $ith respect to the
nu!ber of perfor!ances. ;CB6 P ;>=,666 U A6.
o Tic#et booth personnel and ushers* $ages? ;5<6q
>
. "ariable
$ith respect to the nu!ber of perfor!ances. ;5<6 P
;56,<66 U A6.
o 4cenery, costu!es, and props? ;<,A66q
5
. "ariable $ith
respect to the nu!ber of productions. ;<,A66 P ;C',666 U
B.
o Theater hall rent? ;=B6q
>
. "ariable $ith respect to the
nu!ber of perfor!ances. ;=B6 P ;CB,666 U A6.
o Hrinted progra!s? ;5=Bq
>
. "ariable $ith respect to the
nu!ber of perfor!ances. ;5=B P ;56,B66 U A6.
o Hublicity? ;>,A66q
5
. "ariable $ith respect to the nu!ber of
productions. ;>,A66 P ;5',666 U B.
o Ad!inistrative expenses? ;'>,C66 @ ;5,>%Aq
5
@;=>q
>
.
o ;'>,C66 P 6.=B S ;C',>66
o ;5,>%A P 16.5B S ;C',>662 U B
o ;=> P 16.56 S ;C',>662 U A6
The (unch#in Theater
)lexible Budget
)or the Vear 9nded 8ece!ber '5
Actual nu!ber of productions 1q
5
2 C
Actual nu!ber of perfor!ances 1q
>
2 AC
Actors* and directors* $ages 1;>,C66q
>
2 ;5B',A6
6
4tagehands* $ages 1;CB6q
>
2 ><,<66
Tic#et booth personnel and ushers* $ages
1;5<6q
>
2
55,B>6
4cenery, costu!es, and props 1;<,A66q
5
2 'C,C66
Theater hall rent 1;=B6q
>
2 C<,666
9-!%
Chapter 09 Flexible Budgets and Performance Analysis
Hrinted progra!s 1;5=Bq
>
2 55,>66
Hublicity 1;>,A66q
5
2 56,C66
Ad!inistrative expenses 1;'>,C66 @ ;5,>%Aq
5
@
;=>q
>
2
C>,5%>
Total ;'C6,55
>
9-!9
Chapter 09 Flexible Budgets and Performance Analysis
Case 9-& 1continued2
>. The fexible budget perfor!ance report follo$s?
The (unch#in Theater
)lexible Budget Herfor!ance :eport
)or the Vear 9nded 8ece!ber '5
Plannin
g
Budget
Activity
Variance
s
Flexible
Budget
Spendin
g
Variance
s
Actual
Results
Du!ber of productions 1q
5
2...... B C C
Du!ber of perfor!ances 1q
>
2... A6 AC AC
ActorsO and directorsO $ages
1;>,C66q
>
2.............................
;5CC,66
6
;%,A6
6 E
;5B',A6
6
;B,A6
6 )
;5C<,66
6
4tagehandsO $ages 1;CB6q
>
2.... >=,666 5,<66 E ><,<66 >66 ) ><,A66
Tic#et booth personnel and
ushersO $ages 1;5<6q
>
2......... 56,<66 =>6 E 55,B>6 =<6 E 5>,'66
4cenery, costu!es, and props
1;<,A66q
5
2............................. C',666 <,A66 ) 'C,C66 C,%66 E '%,'66
Theater hall rent 1;=B6q
>
2........ CB,666 ',666 E C<,666 5,A66 E C%,A66
Hrinted progra!s 1;5=Bq
>
2....... 56,B66 =66 E 55,>66 >B6 ) 56,%B6
Hublicity 1;>,A66q
5
2.................. 5',666 >,A66 ) 56,C66 5,A66 E 5>,666
Ad!inistrative expenses
1;'>,C66 @ ;5,>%Aq
5
@
;=>q
>
2....................................
C',>6
6 5,66< )
C>,5%
> BC> ) C5,AB6
Total.........................................
;''A,B6
6
;',A5
> E
;'C6,55
>
;>,><
< E
;'C>,C6
6
9-"0
Chapter 09 Flexible Budgets and Performance Analysis
Case 9-& 1continued2
'. The overall unfavorable spending variance is a very s!all
percentage of the total cost, about 6.=M, $hich suggests that
costs are under control. In addition, the largest unfavorable
variance is for scenery, costu!es, and props. This !ay indicate
$aste, but it !ay also indicate that !ore !oney $as spent on
these ite!s, $hich are highly visible to theater&goers, to ensure
higher&quality productions.
C. The average costs !ay not be very good indicators of the
additional costs of any particular production or perfor!ance.
The averages gloss over considerable variations in costs. )or
exa!ple, a production of Heter the :abbit !ay require only half
a doNen actors and actresses and fairly si!ple costu!es and
props. Fn the other hand, a production of ,inderella !ay
require doNens of actors and actresses and very elaborate and
costly costu!es and props. ,onsequently, both the production
costs and the cost per perfor!ance $ill be !uch higher for
,inderella than for Heter the :abbit. (anagers of theater
co!panies #no$ that they !ust esti!ate the costs of each ne$
production individuallyaverage costs are of little use for this
purpose.
9-"1