
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. Whether owner should feel frustrated with the variance reports or not.
2. The preparation of flexible budget performance report for the school for July.
3. The evaluation of school’s performance for July.

Answer to Problem 22P
Solution:
1. The owner does not need to frustrate over the variance report because there is difference in level of activity between the actual results and the planning budget.
2.
TipTop Flight School
Flexible Budget Performance Report For the Month Ended July 31 |
|||||
Actual
Results |
Revenue /
Spending Variance |
Flexible
Budget |
Activity
Variance |
Planning
Budget |
|
Lessons | 155 | 155 | 150 | ||
Revenue | $ 33,900 | $ 200 U | $ 34,100 | $ 1,100 F | $33,000 |
Expenses: | |||||
Instructor wages | 9,870 | 205 F | 10,075 | 325 U | 9,750 |
Aircraft |
5,890 | 0 | 5,890 | 190 U | 5,700 |
Fuel | 2,750 | 425 U | 2,325 | 75 U | 2,250 |
Maintenance | 2,450 | 60 U | 2,390 | 60 U | 2,330 |
Ground facility expenses | 1,540 | 20 F | 1,560 | 10 U | 1,550 |
Administration | 3,320 | 75 F | 3,395 | 5 U | 3,390 |
Total expenses | 25,820 | 185 U | 25,635 | 665 U | 24,970 |
Net operating income | $8,080 | $ 385 U | $ 8,465 | $ 435 F | $8,030 |
3. The TipTop Flight School has an unfavorable revenue variance of $200 and an unfavorable spending variance of $185. Comparison between the flexible budget and actual results shows the actual variances in revenue and spending since the difference in level of activity has been eliminated. The school has unfavorable variance with regards to revenue, fuel and maintenance expense but also a favorable variance in instructor wages, ground facility expenses and administration expenses.
Explanation of Solution
1. If the planning budget is compared with actual results, the variances in the cost and revenue are influenced with the difference in level of activity. So the variances are not reliable and true.
2. A planning budget is based on budgeted activity and the values are ascertained by multiplying the cost formulas of the component with the budgeted activity and an actual results are the cost and revenue actually earned and incurred during the period.
3. The school did a good job in controlling cost except with cost of fuel. The unfavorable in maintenance expense is significantly low but the management needs to focus on controlling the cost of fuel because it has the highest unfavorable spending variance.
Given: A recent variance report appears below:
TipTop Flight School
Variance Report For the Month Ended July 31 |
|||||
Lessons | Actual
Results |
Planning
Budget |
Variances | ||
Lessons | 155 | 150 | |||
Revenue | $33,900 | $33,000 | $900 F | ||
Expenses: | |||||
Instructor wages | 9,870 | 9,750 | 120 U | ||
Aircraft depreciation | 5,890 | 5,700 | 190 U | ||
Fuel | 2,750 | 2,250 | 500 U | ||
Maintenance | 2,450 | 2,330 | 120 U | ||
Ground facility expenses | 1,540 | 1,550 | 10 F | ||
Administration | 3,320 | 3,390 | 70 F | ||
Total expenses | 25,820 | 24,970 | 850 U | ||
Net operating income | $8,080 | $8,030 | $50 F |
The planning budget was developed using the following formulas, where q is the number of lessons sold:
Cost
Formulas |
|
Revenue | $220q |
Instructor wages | $65q |
Aircraft depreciation | $38q |
Fuel | $15q |
Maintenance | $530+$12q |
Ground facility expenses | $1,250+$2q |
Administration | $3,240+$1q |
It is concluded that TipTop Flight School has an unfavorable revenue variance of $200 and an unfavorable spending variance of $185. A flexible budget puts the light on the true variance between the budgeted results and actual results. It shows the variance caused by the difference in activity and the real variance in the revenue and spending. A flexible budget is prepared by using the actual activity occurred but a planning budget is prepared based on the projected activity.
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