Question

Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below:

  

Exchange Corp Analysis of Revenues and Costs For the Month Ended May 31
	Actual Unit Revenues and Costs			Planning Budget Unit Revenues and Costs			Variances
Exchanges completed		30			25
Revenue	$	635		$	710		$	75	U
Expenses:
Legal and search fees		257			235			22	U
Office expenses		135			257			122	F
Equipment depreciation		25			30			5	F
Rent		75			90			15	F
Insurance		15			18			3	F
Total expense		507			630			123	F
Net operating income	$	128		$	80		$	48	F

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $257 per exchange completed on the planning budget; whereas, the average actual office expense is $135 per exchange completed.  

Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depreciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $5,050.

All of the company’s revenues come from fees collected when an exchange is completed.

Required:  

1. Is the report prepared by the bookkeeper useful as a performance report?

	Yes
	No

  

2. Complete a performance report that would help the owner/manager assess the performance of the company in May. (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

1. No, the report prepared by bookkeeper is not useful as a performance report.

2.  

Exchange Corp. Performance Report Foe The Month Ended May 31
	Planning Budget	Activity variance	Flexible Budget	Revenue/Spending variance	Actual Results
Exchanges completed	25		30		30
Revenues	$17,750 (25*$710)	$3,550 F	$21,300 (30*$710)	$2,250 U	$19,050 (30*$635
Less: Expenses
Legal and search fees	5,875 (25*$235)	1,175 U	7,050 (30*$235)	660 U	7,710 (30*$257)
Office expenses	6,425 (25*$257)	275 U	6,700 *(5,050+30*$55)	2,650 F	4,050 (30*$135)
Equipment depreciation	750	None	750	None	750
Rent	2,250	None	2,250	None	2,250
Insurance	450	None	450	None	450
Total expenses	15,750	1,450 U	17,200	1,990 F	15,210
Net operating income	$2,000	$2,100 F	$4,100	$260 U	$3,840

Working notes:

Office expenses:(Flexible Budget)

Fixed cost =$ 5,050

Variable cost per unit = $6,425 - 5,050 / 25 = $55