In: Accounting
Flaming Foliage Sky Tours is a small sightseeing tour company in
New Hampshire. The firm specializes in aerial tours of the New
England countryside during September and October, when the fall
color is at its peak. Until recently, the company had not had an
accounting department. Routine bookkeeping tasks, such as billing,
had been handled by an individual who had little formal training in
accounting. As the business began to grow, however, the owner
recognized the need for more formal accounting procedures.
Jacqueline Frost has recently been hired as the new controller, and
she will have the authority to hire an assistant.
During her first week on the job, Frost was given the following
performance report. The report was prepared by Red Leif, the
company’s manager of aircraft operations, who was planning to
present it to the owner the next morning. “Look at these favorable
variances for fuel and so forth,” Leif pointed out, as he showed
the report to Frost. “My operations people are really doing a great
job.” Later that day, Frost looked at the performance report more
carefully. She immediately realized that it was improperly prepared
and would be misleading to the company’s owner.
FLAMING FOLIAGE SKY TOURS | ||||||||||||||||||||
Performance Report | ||||||||||||||||||||
For the Month of September | ||||||||||||||||||||
Formula Flexible Budget (per air mile) |
Actual (38,000 air miles) |
Static Budget (40,000 air miles) |
Variance | |||||||||||||||||
Passenger revenue | $ | 10.50 | $ | 399,000 | $ | 420,000 | $ | 21,000 | U | |||||||||||
Less: Variable expenses: | ||||||||||||||||||||
Fuel | $ | 1.40 | $ | 56,900 | $ | 56,000 | $ | -900 | F | |||||||||||
Aircraft maintenance | 2.15 | 79,700 | 86,000 | 6,300 | F | |||||||||||||||
Flight crew salaries | 1.40 | 54,200 | 56,000 | 1,800 | F | |||||||||||||||
Selling and administrative | 2.50 | 92,400 | 100,000 | 7,600 | F | |||||||||||||||
Total variable expenses | $ | 7.45 | $ | 283,200 | $ | 298,000 | $ | 14,800 | F | |||||||||||
Contribution margin | $ | 3.05 | $ | 115,800 | $ | 122,000 | $ | 6,200 | U | |||||||||||
Less: Fixed expenses: | Per Month | |||||||||||||||||||
Depreciation on aircraft | $ | 10,000 | $ | 10,000 | $ | 10,000 | $ | 0 | ||||||||||||
Landing fees | 4,000 | 4,100 | 4,000 | 100 | U | |||||||||||||||
Supervisory salaries | 37,000 | 34,000 | 37,000 | 3,000 | F | |||||||||||||||
Selling and administrative | 46,000 | 51,500 | 46,000 | 5,500 | U | |||||||||||||||
Total fixed expenses | $ | 97,000 | $ | 99,600 | $ | 97,000 | $ | 2,600 | U | |||||||||||
Operating income | $ | 16,200 | $ | 25,000 | $ | 8,800 | U | |||||||||||||
Required:
1. Prepare a columnar flexible budget for Flaming
Foliage Sky Tours’ expenses, using air miles as the cost driver at
the following activity levels: 38,000 air miles, 40,000 air miles,
and 43,000 air miles.
2. In spite of several favorable expense variances
shown on the report above, the company’s September operating income
was only about two-thirds of the expected level. Identify some of
the possible reasons.
4. Prepare a revised expense variance report for
September, which is based on the flexible budget prepared in part
(1).
5. Jacqueline Frost presented the revised expense
report to Leif along with the memo explaining why the original
performance report was misleading. Leif did not take it well. He
complained of Frost’s “interference” and pointed out that the
company had been doing just fine without her. “I’m taking my report
to the owner tomorrow,” Leif insisted. “Yours just makes us look
bad.” What are Frost’s ethical obligations in this matter?
1.
Activity Level (Air Miles) | |||
38,000 | 40,000 | 43,000 | |
Variable expenses: | |||
Fuel | 53,200 | 56,000 | 60,200 |
Aircraft maintenance | 81,700 | 86,000 | 92,450 |
Flight crew salaries | 53,200 | 56,000 | 60,200 |
Selling and administrative | 95,000 | 100,000 | 107,500 |
Total variable expenses | 283,100 | 298,000 | 320,350 |
Fixed expenses: | |||
Depreciation on aircraft | 10,000 | 10,000 | 10,000 |
Landing fees | 4,000 | 4,000 | 4,000 |
Supervisory salaries | 37,000 | 37,000 | 37,000 |
Selling and administrative | 46,000 | 46,000 | 46,000 |
Total fixed expenses | 97,000 | 97,000 | 97,000 |
Total expenses | 380,100 | 395,000 | 417,350 |
2.
The variance report is misleading because the activity levels used for the comparison differ. | |
There is a large unfavorable variance in passenger revenue. | |
Favorable expense variances have no impact on operating income. | |
There are unfavorable variances in fixed expenses. |
4.
Formula Flexible Budget (per air mile) |
Actual (38,000 air miles) |
Flexible Budget (38,000 air miles) | Variance | ||
Variable expenses: | |||||
Fuel | $ 1.40 | 56,900 | 53,200 | 3,700 | Unfavorable |
Aircraft maintenance | $ 2.15 | 79,700 | 81,700 | 2,000 | Favorable |
Flight crew salaries | $ 1.40 | 54,200 | 53,200 | 1,000 | Unfavorable |
Selling and administrative | $ 2.50 | 92,400 | 95,000 | 2,600 | Favorable |
Total variable expenses | $ 7.45 | 283,200 | 283,100 | 100 | Unfavorable |
Fixed expenses: | Per Month | ||||
Depreciation on aircraft | 10,000 | 10,000 | 10,000 | 0 | None |
Landing fees | 4,000 | 4,100 | 4,000 | 100 | Unfavorable |
Supervisory salaries | 37,000 | 34,000 | 37,000 | 3,000 | Favorable |
Selling and administrative | 46,000 | 51,500 | 46,000 | 5,500 | Unfavorable |
Total fixed expenses | 97,000 | 99,600 | 97,000 | 2,600 | Unfavorable |
Total expenses | 382,800 | 380,100 | 2,700 | Unfavorable |
5.
Frost should let Leif decide on the best course of action. | |
Frost should resign in protest. | |
Frost should show the owner her memo to Leif as well as the revised expense variance report. | |
Frost has an ethical obligation to make the owner aware that she believes Leif's analysis is faulty. |