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Tiptop Flight School offers flying lessons at a small municipal airport. The school's owner and the manager have been attempting to evaluate performance and control costs using a variance report that compares the planning budget to actual results. A recent variance report appears below:

Tiptop Flight School
Variance Report
For the Month Ended July 31
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 expense 25,820 24,970 850 U
Net operating income $8,080 $8,030 $50 F
After several months of using such variance reports, the owner has become frustrated. For example. she is quite confident that instructor wages were very tightly controlled in July. but the report shows an unfavorable variance. The planning budget was developed using the following formulas, where q is the number of lessons sold:

Cost Formulas
Revenue $220 q
Instructor wages $65 q
Aircraft depreciation $38 q
Fuel $15 q
Maintenance $530 + $12 q
Ground facility expenses $1,250 + $2 q
Administration $3,240 + $1 q
Required:

1. Should the owner feel frustrated with the variance reports? Explain.

2. Prepare a flexible budget performance report for the school for July.

3. Evaluate the school's performance for July.

Respuesta :

jepessoa

Answer:

1. Should the owner feel frustrated with the variance reports?

Yes, because they were incomplete. Since the quantity of lessons is larger than the budgeted, you must prepare a flexible budget. The flexible budget shows that there exists a total unfavorable variance of $385. E.g. , regarding the pilots' salaries, there is a favorable variance in the flexible budget.

2. Prepare a flexible budget performance report for the school for July.

I used an excel spreadsheet to prepare a flexible budget and I attached it.

3. Evaluate the school's performance for July.

The school's performance is neither good or bad because it has higher revenues than estimated (even though it lowered its sales price), but their costs are also higher than budgeted. They are doing a good job at selling their lessons, but a bad job of keeping costs under control. The overall variance is not that significant, but it is still unfavorable. Their fuel expenses should be controlled since the largest unfavorable variance results from spending too much fuel.

Explanation:

                                                    Actual            Planning        Variances

                                                    Results           Budget

Lessons                                         155                 150                     5 F

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 expense                  $25,820            $24,970          $850 U

Net operating income                $8,080              $8,030            $50 F

anthougo

1. The school proprietor should not feel frustrated with the variance reports as they are meant to provide guidance and not a feeder for frustration.  A careful review of the variance reports will help the owner to understand the cost dynamics for improvements.

2. The flexible budget performance report for the school in the month of July is as follows:

Tiptop Flight School

Flexible Budget Performance Report

For the Month Ended July 31

                                         Actual Results   Flexible Budget   Variances

Lessons                                    155                       155

Revenue                                 $33,900            $34,100            $200 U

Expenses:

Instructor wages                        9,870                10,075              205 F

Aircraft depreciation                 5,890                 5,890               0     None

Fuel                                            2,750                 2,325             (425) U

Maintenance                             2,450                 2,390               (60) U

Ground facility expenses         1,540                  1,560                20  F

Administration                         3,320                  3,395                75 F

Total expense                       25,820                25,635              185 U

Net operating income       $8,080               $8,465            $385 U

3. The school's performance in July is not encouraging based on the flexible budget.  There may be the need for the owner to review the price per lesson upward, keeping customers' effective demand in mind.

Data and Calculations:

The actual number of lessons for July, q = 155

Flexing the Budget:

Revenue $220 q = $34,100

Instructor wages $65 q = $10,075

Aircraft depreciation $38 q = $5,890

Fuel $15 q = $2,325

Maintenance $530 + $12 q = $2,390

Ground facility expenses $1,250 + $2 q = $1,560

Administration $3,240 + $1 q = $3,395

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