Question

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		30			25
Revenue	$	640		$	740		$	100	U
Expenses:
Legal and search fees		275			250			25	U
Office expenses		233			266			33	F
Equipment depreciation		25			30			5	F
Rent		75			90			15	F
Insurance		15			18			3	F
Total expense		623			654			31	F
Net operating income	$	17		$	86		$	69	U

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $266 per exchange completed on the planning budget; whereas, the average actual office expense is $233 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 $5,200.

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?

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

Answer 1

1	No
	The report prepared by the bookeeper is not useful as actual and budgeted exchange completed are different and can be compared.

2	Exchange corp
	Flexible Budget performance report
	For the month ended May 31
		Actual results	Revenue and Spending Variances		Flexible Budget	Activity Variance		Planning Budget
	Exchange completed	30			30			25
	Revenue	$                             19,200	3,000	U	$   22,200	3,700	F	$    18,500
	Expenses:
	Legal and search fees	$                               8,250	$                  750	U	$      7,500	$      1,250	U	$      6,250
	Office expenses	$                               6,990	$                     50	U	$      6,940	$          290	U	$      6,650
	Equipment depreciation	$                                   750	$                      0	None	$         750	$             0	None	$          750
	Rent	$                               2,250	$                      0	None	$      2,250	$             0	None	$      2,250
	Insurance	$                                   450	$ 0	None	$         450	$             0	None	$          450
	Total expense	$                             18,690	$                  800	U	$   17,890	$      1,540	U	$    16,350
	Net operating Income	$                                   510	$               3,800	U	$      4,310	$      2,160	F	$      2,150