Question

ABC Corporation is a service company that measures its output based on the number of customers served. The company provided the following fixed and variable cost estimates that it uses for budgeting purposes:

Fixed amount per month Variable amount per customer

Revenue $5,000

Payroll cost $50,000 $1,100

Travel expenses $600

Admin expenses $36,000 $500

Other expenses $10,000 $200

When preparing its planning budget, the company estimated that it would serve 60 customers per month; however, during April the company actually served 55 customers.

What amount of net operating income would appear in ABC's static budget for April?

Is there a need to prepare a flexible budget for April? If so, explain why. Further, what amount of net operating income would appear on ABC's flexible budget for April?

Answer 1

Static Budget for the month of April:

Particulars	Amount ($)
Sales => $5000 * 60 customers	300,000
Less: Payroll cost => $50,000 + ($1,100 * 60 customers)	(116,000)
Less: Travel Expenses => $600 * 60 customers	(36,000)
Less: Admin Expenses => $36,000 + ($500 * 60 customers)	(66,000)
Less: Other Expenses => $10,000 + ($200 * 60 customers)	(22,000)`
Net Operating Income	60,000

Since majority of costs are directly proportionate to the activity level or volume, ABC has the requirement to prepare a flexible budget since flexible budget is more sophisticated and useful than flexible budget especially where there is possibility for variance in the budgeted level of activity and actual level of activity

Flexible Budget for the Month of April:

Particulars	60 Customer	55 Customer
Sales	$5,000 * 60 customers = $300,000	$5,000 * 55 Customers = $275,000
Less: Payroll cost	$50,000 + ($1,100 * 60 customers)= (116,000)	$50,000 + ($1,100 * 55 customers)= (106,500)
Less: Travel Expenses	$600 * 60 customers = (36,000)	$600 * 55 customers = (33,000)
Less: Admin Expenses	$36,000 + ($500 * 60 customers)= ($66,000)	$36,000 + ($500 * 55 customers) = ($63,500)
Less: Other Expenses	$10,000 + ($200 * 60 customers)= ($22,000)	$10,000 + ($200 * 55 customers) =($37,500)
Net Operating Income	60,000	34,500