Chapter 9, Problem 22P

To determine

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 depreciation	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

Conclusion

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.