Question

Milano Pizza is a small neighborhood pizzeria that has a small area for in-store dining as well as offering take-out and free home delivery services. The pizzeria’s owner has determined that the shop has two major cost drivers—the number of pizzas sold and the number of deliveries made.

The pizzeria’s cost formulas appear below:

	Fixed Cost per Month			Cost per Pizza			Cost per Delivery
Pizza ingredients				$	4.40
Kitchen staff	$	5,910
Utilities	$	610		$	0.30
Delivery person							$	3.10
Delivery vehicle	$	630					$	1.50
Equipment depreciation	$	400
Rent	$	1,870
Miscellaneous	$	730		$	0.15

  

In November, the pizzeria budgeted for 1,560 pizzas at an average selling price of $15 per pizza and for 220 deliveries.

Data concerning the pizzeria’s actual results in November appear below:

  

	Actual Results
Pizzas		1,660
Deliveries		200
Revenue	$	25,450
Pizza ingredients	$	7,210
Kitchen staff	$	5,850
Utilities	$	885
Delivery person	$	620
Delivery vehicle	$	986
Equipment depreciation	$	400
Rent	$	1,870
Miscellaneous	$	790

Required:

1. Complete the flexible budget performance report that shows both revenue and spending variances and activity variances for the pizzeria for November. (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

Solution: Computation of flexible budget performance report showing Revenue and spending variance

Milano pizza
Revenue and spending variance
For the month ended November 30th
	Actual results	Revenue and spending variance (Actual – Flexible)	Flexible budget (Working note 1)
Pizzas	1660		1660
Deliveries	200		200
Revenue	$ 25,450	$ 550 F	$ 24,900
Expenses:
1. Pizza ingredients	$ 7,210	$ 94 F	$ 7,304
2. Kitchen staff	$ 5,850	$ 60 F	$ 5,910
3. Utilities	$ 885	$ 223 F	$ 1,108
4. Delivery person	$ 620	NONE	$ 620
5. Delivery vehicle	$ 986	$ 56 U	$ 930
6. Equivalent depreciation	$ 400	NONE	$ 400
7. Rent	$ 1,870	NONE	$ 1,870
8. Miscellaneous expense	$ 790	$ 189 F	$ 979
Total expenses	$ 18,611	$ 510 F	$ 19,121
Net operating Income	$ 6839	$ 1060 F	$ 5,779

Working note 1:

Computation of flexible budget

Particulars	Working	Amount in $
Sales revenue	Actual sales * Budgeted sale price ( 1,660 *$ 15 = $ 24,900)	$ 24,900
Expenses
1. Pizza ingredients	(1660 pizzas *$ 4.40 = $ 7,304)	$ 7,304
2. Kitchen staff	-	$ 5,910
3. Utilities	$ 610 +1,660 pizzas*$ 0.30 =$ 1108	$ 1,108
4. Delivery person	200 deliveries*$ 3.10 = $ 620	$ 620
5. Delivery vehicle	$ 630 + 200 deliveries *$ 1.50 = $ 930	$ 930
6. Equivalent depreciation	-	$ 400
7. Rent	-	$ 1,870
8. Miscellaneous expense	$ 730 + 1660 pizzas *$ 0.15 = $979	$ 979
Total expense		$ 19,121
Net operating income	Sales – Total expenses	$ 5,779

Computation of flexible budget performance report showing Activity variances

Milano pizza
Activity variances
For the month ended November 30th
	Flexible budget (Working note 1)	Activity variance ( Flexible - static ) budgets	Static budget (Working note 2)
Pizzas	1660		1560
Deliveries	200		220
Revenue	$ 24,900	$ 1,500 F	$ 23,400
Expenses:
1. Pizza ingredients	$ 7,304	$ 440 U	$ 6,864
2. Kitchen staff	$ 5,910	NONE	$ 5,910
3. Utilities	$ 1,108	$ 30 U	$ 1078
4. Delivery person	$ 620	$ 62 F	$ 682
5. Delivery vehicle	$ 930	$ 30 F	$ 960
6. Equivalent depreciation	$ 400	NONE	$ 400
7. Rent	$ 1,870	NONE	$ 1870
8. Miscellaneous expense	$ 979	$ 15 U	$ 964
Total expenses	$ 19,121	$ 393 U	$ 18,728
Net operating Income	$ 5,779	$ 1107 F	$ 4,672

Working note 2:

Computation of Static (Planned) budget

Particulars	Working	Amount in $
Sales revenue	Budgeted sales * Budgeted sale price ( 1560 pizzas *$ 15)	$ 23,400
Expenses
1. Pizza ingredients	(1560 pizzas *$ 4.40 = $ 6,864)	$ 6,864
2. Kitchen staff	-	$ 5,910
3. Utilities	$ 610 +1,560 pizzas *$ 0.30 =$ 1078	$ 1078
4. Delivery person	220 deliveries*$ 3.10 = $ 682	$ 682
5. Delivery vehicle	$ 630 + 220 deliveries *$ 1.50 = $ 960	$ 960
6. Equivalent depreciation	-	$ 400
7. Rent	-	$ 1870
8. Miscellaneous expense	$ 730 + 1560 pizzas *$ 0.15 = $ 964	$ 964
Total expense		$ 18,728
Net operating income	Sales – Total expenses	$ 4,672