Question

Its Just Lunch is a match-making service for professionals. The company had the following income statement for June:

It’s Just Lunch, Inc.
Income Statement (Actual versus Budget)
For the Month Ended June 30
	Budget	Actual	Variance
# of couples matched	120	150	30 F
Revenues	$12,000	$14,500	$2,500 F
Variable costs
Hand Selected Matching	$3,000	$3,600	$600 U
Client screening	2,400	1,500	900 F
Billing	1,200	1,450	250 U
Total variable costs	6,600	6,550	50 F
Fixed costs
Office expenses	2,000	1,800	200 F
Insurance expense	900	950	50 U
Total fixed costs	2,900	2,750	150 F
Total costs	9,500	9,300	200 F
Net income	$2,500	$5,200	$2,700 F

Ann Zimmerer, the manager commented on the report: “June was an amazing month. We had more business than we expected and we still managed to keep costs down – it would be great if every month could be this good”.

Required:

1. What is the major flaw in the report above.
2. Prepare a revised report using a flexible budget.
3. Comment on Zimmerer’s assertion that it was an “amazing month”.
4. Which variance(s) ought to be investigated further?

Answer 1

What is the major flaw in the report above?

Solution - The major flaw of the report is actual production is higher than budgeted production yet, actual variable cost is lesser than budgeted variable cost. Variable costs increase or decrease hinge on a company's production volume; they rise as production increases and falls as production decreases. Here in this report, actual production is 300 more than what was budgeted so variable cost should also increase. This was one of the major flaws of the report.

The second flaw is that, actual production is higher than budgeted production yet, actual fixed cost is lesser than budgeted fixed cost. A fixed cost is a expense that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities. So it can't be less than what was budgeted for 120 quantity , because here the company is producing 150 quantity. That's why it should be equal to what was budgeted for 120 quantity or it can be higher than budgeted cause of some exceptional reasons.

Revised report using flexible budget technique-

Zimmerer assertion “June was an amazing month. We had more business than we expected and we still managed to keep costs down – it would be great if every month could be this good” was right because June was really an amazing month for the company also company did more business than expected still managed to keep the cost low because the actual couple matched was increased by 25% while the total cost is increased just by 17.36% and Net income is increased by 54%.

Which variance(s) ought to be investigated further?

I think fixed costs should be investigated again and re-calculate the variances. I have assumed the same fixed cost for actual and budgeted quantity due to lack of proper information which is a common practice. If you notice production is just increased by 25% while the profit is increased by 54%. That's why the company should look into the figures of fixed cost for actual production, there can be an exceptional case of increasing fixed cost.