Question

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 (39,000 air miles)			Static Budget (41,000 air miles)			Variance
Passenger revenue	$	11.00		$	429,000		$	451,000		$	22,000	U
Less: Variable expenses:
Fuel	$	1.50		$	62,300		$	61,500		$	-800	F
Aircraft maintenance		2.20			83,500			90,200			6,700	F
Flight crew salaries		1.50			59,100			61,500			2,400	F
Selling and administrative		2.60			100,400			106,600			6,200	F
Total variable expenses	$	7.80		$	305,300		$	319,800		$	14,500	F
Contribution margin	$	3.20		$	123,700		$	131,200		$	7,500	U
Less: Fixed expenses:	Per Month
Depreciation on aircraft	$	10,100		$	10,100		$	10,100		$	0
Landing fees		4,100			4,300			4,100			200	U
Supervisory salaries		38,000			34,500			38,000			3,500	F
Selling and administrative		47,000			52,600			47,000			5,600	U
Total fixed expenses	$	99,200		$	101,500		$	99,200		$	2,300	U
Operating income				$	22,200		$	32,000		$	9,800	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: 39,000 air miles, 41,000 air miles, and 44,000 air miles.

Prepare a columnar flexible budget for Flaming Foliage Sky Tours’ expenses, using air miles as the cost driver at the following activity levels: 39,000 air miles, 41,000 air miles, and 44,000 air miles.

	Activity Level (Air Miles) 39,000 41,000 44,000 Variable expenses: Fuel Aircraft maintenance Flight crew salaries Selling and administrative Total variable expenses Fixed expenses: Depreciation on aircraft Landing fees Supervisory salaries Selling and administrative Total fixed expenses Total expenses

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.

	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.

Prepare a revised expense variance report for September, which is based on the flexible budget prepared in part (1).(Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Round "per air mile" answers to 2 decimal places.)

	Formula Flexible Budget (per air mile) Actual (39,000 air miles) Flexible Budget (39,000 air miles) Variance Variable expenses: Total variable expenses $0.00 $0 $0 Fixed expenses: Per Month Total fixed expenses $0 $0 $0 Total expenses

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? (Select which of the following statements (is) are true by selecting an "X".)

	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.

Answer 1

FLAMING FOLIAGE SKY TOURS
working
Performance Report
For the Month of September
		Formula Flexible Budget (per air mile)	Actual (39,000 air miles)	Static Budget (41,000 air miles)	Variance
Passenger revenue	$	11	429,000	451,000	22,000	U
Less: Variable expenses:
Fuel	$	1.5	62,300	61,500	-800	F
Aircraft maintenance		2.2	83,500	90,200	6,700	F
Flight crew salaries		1.5	59,100	61,500	2,400	F
Selling and administrative		2.6	100,400	106,600	6,200	F
Total variable expenses	$	7.8	305,300	319,800	14,500	F
Contribution margin	$	3.2	123,700	131,200	7,500	U
Less: Fixed expenses:	Per Month
Depreciation on aircraft	$	10,100	10,100	10,100	0
Landing fees		4,100	4,300	4,100	200	U
Supervisory salaries		38,000	34,500	38,000	3,500	F
Selling and administrative		47,000	52,600	47,000	5,600	U
Total fixed expenses	$	99,200	101,500	99,200	2,300	U
Operating income			22,200	32,000	5,200
	Activity Level (Air Miles)
	39,000	41,000	44,000
Variable expenses: (from the above table rate per mile*no. of miles)
Fuel (1.5*39000,41000,44000)	58500	61500	66000
Aircraft maintenance	85800	90200	96800
Flight crew salaries	58500	61500	66000
Selling and administrative	101400	106600	114400
Total variable expenses	304200	319800	343200
Fixed expenses:
Depreciation on aircraft	10,100	10,100	10,100
Landing fees	4,100	4,100	4,100
Supervisory salaries	38,000	38,000	38,000
Selling and administrative	47,000	47,000	47,000
Total fixed expenses	99,200	99,200	99,200
Total expenses	403,400	419,000	442,400
ans 2
The variance report is misleading because the activity levels used for the comparison differ.
There are unfavorable variances in fixed expenses.
ans 3
	Formula Flexible Budget (per air mile)	Actual (39,000 air miles)	Flexible Budget (39,000 air miles)	Variance
Variable expenses:
Fuel	1.5	62,300	58500	3,800	U
Aircraft maintenance	2.2	83,500	85800	2,300	F
Flight crew salaries	1.5	59,100	58500	600	U
Selling and administrative	2.6	100,400	101400	1,000	F
Total variable expenses	7.8	305,300	304200	1,100	U
Less: Fixed expenses:
Depreciation on aircraft	10,100	10,100	10,100	0	None
Landing fees	4,100	4,300	4,100	200	U
Supervisory salaries	38,000	34,500	38,000	3,500	F
Selling and administrative	47,000	52,600	47,000	5,600	U
Total fixed expenses	99,200	101,500	99,200	2,300	U
ans 4
3) X
4) X
1 and 2 are false