Question

In: Accounting

Flaming Foliage Sky Tours is a small sightseeing tour company in New Hampshire. The firm specializes...

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?

Solutions

Expert Solution

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.

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