Question

Thomasson Air uses two measures of activity, flights and passengers, in the cost formulas in its budgets and performance reports. The cost formula for plane operating costs is $36,160 per month plus $2,038 per flight plus $1 per passenger. The company expected its activity in April to be 73 flights and 223 passengers, but the actual activity was 72 flights and 228 passengers. The actual cost for plane operating costs in April was $179,020. The activity variance for plane operating costs in April would be closest to:

A)$6,137 U
B)$6,137 F
C)$2,033 U
D)$2,033 F

Answer 1

D)$2,033 F

Step-by-step explanation:

The formula for perating costs is:

`C= 36,100 +2,038F+1P`

Where 'F' is the number of flights and 'P' is the number of passengers.

If the company expected 73 flights and 223 passengers, expected costs were:

`E= 36,160 +2,038*73+1*223\\E=\$185,157`

If the company had an activity of 72 flights and 228 passengers, the actual costs were:

`C= 36,160 +2,038*72+1*228\\C=\$183,064`

The operating cost variance is:

`C=\$185,157-\$183,064\\C=\$2,033`

Since actual costs are lower than expected costs, the variance is favorable. Therefore, the answer is D)$2,033 F.