Question

Exercise 9-17 Flexible Budget Performance Report [LO9-1, LO9-2, LO9-3, LO9-4]

AirQual Test Corporation provides on-site air quality testing services. The company has provided the following cost formulas and actual results for the month of February:
Fixed Component
per Month Variable
Component per Job Actual Total
for February
Revenue $ 275 $ 38,500
Technician wages $ 8,100 $ 7,950
Mobile lab operating expenses $4,800 $ 33 $ 9,590
Office expenses $ 2,400 $ 2 $ 2,550
Advertising expenses $1,590 $ 1,660
Insurance $ 2,850 $ 2,850
Miscellaneous expenses $ 960 $ 2 $ 565
The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses should be $4,800 plus $33 per job, and the actual mobile lab operating expenses for February were $9,590. The company expected to work 150 jobs in February, but actually worked 160 jobs.
Required:
Prepare a flexible budget performance report showing AirQual Test Corporation’s revenue and spending variances and activity variances for February. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

AirQual Test Corporation

Flexible Budget Performance Report for February:

Fixed Variable Flexible Actual

Component Budget Total

Revenue $ 275 $38,500 $ 38,500 0 None

Technician wages $ 8,100 $8,100 $ 7,950 150 F

Mobile lab operating

expenses $4,800 $ 33 $10,080 $ 9,590 490 F

Office expenses $ 2,400 $ 2 $2,720 $ 2,550 170 F

Advertising expenses $1,590 $1,590 $ 1,660 70 U

Insurance $ 2,850 $2,850 $ 2,850 0 None

Miscellaneous expenses $ 960 $ 2 $1,280 $ 565 715 F

Step-by-step explanation:

Fixed Component Variable Budget Actual

Revenue $ 275 $41,250 $ 38,500

Technician wages $ 8,100 $8,100 $ 7,950

Mobile lab operating

expenses $4,800 $ 33 $9,750 $ 9,590

Office expenses $ 2,400 $ 2 $2,700 $ 2,550

Advertising expenses $1,590 $1,590 $ 1,660

Insurance $ 2,850 $2,850 $ 2,850

Miscellaneous expenses $ 960 $ 2 $1,260 $ 565

b) Variable elements for the flexible budget:

1) Mobile lab operating expenses = $4,800 + ($33 x 160) = $10,080

2) Office Expenses = $2,400 + ($2 x 160) = $2,720

3) Miscellaneous expenses = $960 + ($2 x 160) = $1,280

c) A flexible budget is a budget that is flexed with regard to the volume of activity, with respect to the variable elements. This budget type changes in value as a result of the changes in the volume of activity. It is different from a static budget, which does not change in value following the level of activity and does not account for changing incomes and expenses.