Question

In: Accounting

Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such...

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.

Solutions

Expert Solution

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 $                      -   None $         750 $             -   None $          750
Rent $                               2,250 $                      -   None $      2,250 $             -   None $      2,250
Insurance $                                   450 $                      -   None $         450 $             -   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

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