Question

Question 5 ch 10

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		25			20
Revenue	$	540		$	580		$	40	U
Expenses:
Legal and search fees		179			170			9	U
Office expenses		181			218			37	F
Equipment depreciation		24			30			6	F
Rent		60			75			15	F
Insurance		12			15			3	F
Total expense		456			508			52	F
Net operating income	$	84		$	72		$	12	F

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $218 per exchange completed on the planning budget; whereas, the average actual office expense is $181 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 $4,300.

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

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

Answer: No

2

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

Exchange Corp
Analysis of Revenues and Costs
For the Month Ended May 31
	Activity Unit Revenues and Costs	Activity Variances		Flexible Budget	Revenue and Spending Variances		Planning Budget Unit Revenues and cost
Exchanges completed	25			25			20
Revenue	13500	1000	U	14500	2900	F	11600
Expenses:
Legal and search fees	4475	225	U	4250	850	U	3400
Office expenses	4525	150	U	4375	15	U	4360
Equipment depreciation	600	0		600	0		600
Rent	1500	0		1500	0		1500
Insurance	300	0		300	0		300
Total expense	11400	375	U	11025	865	F	10160
Net operating income	2100	1375	U	3475	2035	F	1440

Working notes for the above answer is as under