Question

Pearse Kennel uses tenant-days as its measure of activity; an animal housed in the kennel for one day is counted as one tenant-day. During December, the kennel budgeted for 5,300 tenant-days, but its actual level of activity was 5,320 tenant-days. The kennel has provided the following data concerning the formulas used in its budgeting and its actual results for December:

Data used in budgeting:

	Fixed element per month	Variable element per tenant-day
Revenue	—	$31.80
Wages and salaries	$4,300	$7.80
Food and supplies	900	12.60
Facility expenses	8,700	4.80
Administrative expenses	7,700	0.60
Total expenses	$21,600	$25.80

Actual results for December:

Revenue	$109,080
Wages and salaries	$23,630
Food and supplies	$36,803
Facility expenses	$19,380
Administrative expenses	$9,166

The net operating income in the flexible budget for December would be closest to:

a. $20,007

b. $20,101

c. $10,200

d. $10,320

Answer 1

Solution:

Flexible budget is the budget prepared at standard cost but by taking the actual activity level achieved. It helps management to see the performance and compare the budgeted cost/revenue with the actual results.

Calculation of Net Income as per Flexible Budget

Actual Level of Activity	5,320 Tenant Days
	$$
Revenue (5,320*$31.80)	$169,176
Less: Variable Expenses (5,320*Total Variable Cost per unit $25.80)	$137,256
Contribution Margin	$31,920 (169,176 – 137,256)
Less: Total Fixed Costs	$21,600
Net Operating Income	$10,320 (31,920 – 21,600)

Hence, the Net Operating Income as per Flexible Budget = $10,320

The correct option is d. $10,320

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