Question

Lavage Rapide is a Canadian company that owns and operates a large automatic car wash facility near Montreal. The following table provides data concerning the company’s costs:

	Fixed Cost per Month			Cost per Car Washed
Cleaning supplies				$	0.40
Electricity	$	1,000		$	0.05
Maintenance				$	0.15
Wages and salaries	$	5,000		$	0.40
Depreciation	$	8,100
Rent	$	1,900
Administrative expenses	$	1,400		$	0.04

For example, electricity costs are $1,000 per month plus $0.05 per car washed. The company expects to wash 8,500 cars in August and to collect an average of $6.10 per car washed.

The actual operating results for August appear below.

Lavage Rapide
Income Statement
For the Month Ended August 31
Actual cars washed		8,600
Revenue	$	53,950
Expenses:
Cleaning supplies		3,900
Electricity		1,395
Maintenance		1,515
Wages and salaries		8,760
Depreciation		8,100
Rent		2,100
Administrative expenses		1,640
Total expense		27,410
Net operating income	$	26,540

Required:

Prepare a flexible budget performance report that shows the company’s revenue and spending variances and activity variances for August. (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

• Requirement asked

	Actual Result	Revenue & Spending Variance		Flexible Budget	Activity variance		Planning Static Budget
Cars washed	8,600			8,600			8,500
	[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]	[D = Difference between C & E]		[E= Fixed + (Var x Planned units)]
Revenues	$          53,950.00	$                  1,490.00	F	$                                   52,460.00	$                     610.00	F	$                                        51,850.00
Expenses:
Cleaning Supplies	$            3,900.00	$                     460.00	U	$                                     3,440.00	$                       40.00	U	$                                          3,400.00
Electricity	$            1,395.00	$                        35.00	F	$                                     1,430.00	$                         5.00	U	$                                          1,425.00
Maintenance	$            1,515.00	$                     225.00	U	$                                     1,290.00	$                       15.00	U	$                                          1,275.00
Wages & Salaries	$            8,760.00	$                     320.00	U	$                                     8,440.00	$                       40.00	U	$                                          8,400.00
Depreciation	$            8,100.00	$                               -	N	$                                     8,100.00	$                              -	None	$                                          8,100.00
Rent	$            2,100.00	$                     200.00	U	$                                     1,900.00	$                              -	None	$                                          1,900.00
Administrative expense	$            1,640.00	$                     104.00	F	$                                     1,744.00	$                         4.00	U	$                                          1,740.00
Total Expenses	$          27,410.00	$                  1,066.00	U	$                                   26,344.00	$                     104.00	U	$                                        26,240.00
Net Operating Income	$          26,540.00	$                     424.00	F	$                                   26,116.00	$                     506.00	F	$                                        25,610.00

• Workings

	WORKING COLUMNS
Cars washed
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Revenues		(	$                  6.10	x	8600 or 8500	)
Expenses:
Cleaning Supplies	$                      -	+(	$                  0.40	x	8600 or 8500	)
Electricity	$         1,000.00	+(	$                  0.05	x	8600 or 8500	)
Maintenance	$                      -	+(	$                  0.15	x	8600 or 8500	)
Wages & Salaries	$         5,000.00	+(	$                  0.40	x	8600 or 8500	)
Depreciation	$         8,100.00	+(	$                      -	x	8600 or 8500	)
Rent	$         1,900.00	+(	$                      -	x	8600 or 8500	)
Administrative expense	$         1,400.00	+(	$                  0.04	x	8600 or 8500	)
Total Expenses	$      17,400.00	+(	$                  1.04	x	8600 or 8500	)

Conceptual notes:

#1: Flexible Budget data is based on 'budgeted rates' applied on 'actual level/output/units'

#2: Spending Variance = Difference between 'Actual data' and 'Flexible Budget data'

#3: Activity Variance = Difference between 'Flexible Budget data' and 'Static/Planned Budget data'.

* Favourable Variance in case of Revenues occurs when:

>Actual revenues are MORE than Flexible budget revenues [Spending Variance]

>Flexible budget revenues are MORE than Static/Planned budget revenues [Activity Variance]

* Unfavourable Variance in case of Revenues occurs when:

>Actual revenues are LESS than Flexible budget revenues [Spending Variance]

>Flexible budget revenues are LESS than Static/Planned budget revenues [Activity Variance]

* Favourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are LESS than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are LESS than Static/Planned budget expenses/costs [Activity Variance]

* Unfavourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are MORE than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are MORE than Static/Planned budget expenses/costs [Activity Variance]