Flexible budget performance report: A flexible budget shows the true difference between the actual cost and revenue and budgeted cost and revenue. The budgeted value is adjusted by preparing a flexible budget which is prepared based on actual level of activity.
1. The preparation of a flexible budget performance report
2. Explain the activity variances.
Answer to Problem 21P
Solution:
1.
| Milano Pizza’s
Flexible Budget Performance Report |
|||||
| Actual
Results |
Revenue /
Spending Variance |
Flexible
Budget |
Activity
Variance |
Planning
Budget |
|
| Pizzas | 1,240 | 1,240 | 1,200 | ||
| Deliveries | 174 | 174 | 180 | ||
| Revenue | $17,420 | $680 F | $16,740 | $540 F | $16,200 |
| Expenses: | |||||
| Pizzas ingredients | $4,985 | $273 U | $4,712 | $152 U | $4,560 |
| Kitchen staff | $5,281 | $61 U | $5,220 | 0 | $5,220 |
| Utilities | $984 | $292 U | $692 | $2 U | $690 |
| Delivery person | $609 | 0 | $609 | $21 F | $630 |
| Delivery vehicle | $655 | $146 F | $801 | $9 F | $810 |
| Equipment |
$275 | 0 | $275 | 0 | $275 |
| Rent | $1,830 | 0 | $1,830 | 0 | $1,830 |
| Miscellaneous | $954 | $52 F | $1,006 | $6 U | $1,000 |
| $15,573 | $428 U | $15,145 | $130 U | $15,015 | |
| $1,847 | $252 F | $1,595 | $410 F | $1,185 | |
2. The pizzeria has an overall favorable activity variance of $410. The activity variance is caused by the difference in the level of activity variance. The planning budget was prepared using the projected sales and delivery of 1,200 pizzas and 180 deliveries and the flexible budget is prepared based on 1,240 pizzas and 174 deliveries. So the difference of 40 pizzas and 6 deliveries will caused a difference in the revenue and expenses.
Explanation of Solution
The planning budget is prepared by multiplying the budgeted activity with cost formulas and the flexible budget is prepared by multiplying the actual activity with cost formulas according to their relevance. An activity variance is caused by difference between actual activity and budgeted activity while revenue and spending variance is caused by other factors like changes in costs, uncertain events and etc. since the difference in the activity is eliminated.
Given:
| Fixed Cost
per Month |
Cost per
Pizza |
Cost per
Delivery |
|
| Pizza ingredients | $3.80 | ||
| Kitchen staff | $5,220 | ||
| Utilities | $630 | $0.05 | |
| Delivery person | $3.50 | ||
| Delivery vehicle | $540 | $1.50 | |
| Equipment depreciation | $275 | ||
| Rent | $1,830 | ||
| Miscellaneous | $820 | $0.15 |
Data concerning the pizzeria’s actual results in November appear below:
| Actual Results | |
| Pizzas | 1,240 |
| Deliveries | 174 |
| Revenue | $17,420 |
| Pizzas ingredients | $4,985 |
| Kitchen staff | $5,281 |
| Utilities | $984 |
| Delivery person | $609 |
| Delivery vehicle | $655 |
| Equipment depreciation | $275 |
| Rent | $1,830 |
| Miscellaneous | $954 |
Hence it is concluded that the Malino Pizza has favorable activity variance of $410 and favorable revenue and spending variance of $252. The favorability of variance is based on whether the variance is improving the net operating income or decreasing it. If the variance is increasing the net operating income, it is a favorable variance and if the variance is decreasing the net operating income, it is an unfavorable variance.
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