Question

Lavage Rapide is a Canadian company that owns and operates a large automatic carwash facility near Montreal. The following table provides data concerning the company’s costs:

Fixed Cost per Month

Cost per Car Washed

Cleaning supplies				$	0.70
Electricity	$	1,100		$	0.07
Maintenance				$	0.15
Wages and salaries	$	4,900		$	0.30
Depreciation	$	8,100
Rent	$	1,900
Administrative expenses	$	1,800		$	0.02

  

For example, electricity costs are $1,100 per month plus $0.07 per car washed. The company expects to wash 8,300 cars in August and to collect an average of $6.20 per car washed.

  

The actual operating results for August appear below.

  

Lavage Rapide Income Statement For the Month Ended August 31
Actual cars washed		8,400
Revenue	$	53,560
Expenses:
Cleaning supplies		6,310
Electricity		1,651
Maintenance		1,485
Wages and salaries		7,750
Depreciation		8,100
Rent		2,100
Administrative expenses		1,866
Total expense		29,262
Net operating income	$	24,298

  

Required:

Complete the flexible budget performance report that shows the company’s activity variances and revenue and spending variances for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

Solution:

Revenue and spending variance is the difference of Actual Result and Flexible Budget.

Activity Variance is the difference of Flexible Budget and Planned Budget.

So, we need to prepare the Planned Budget and Flexible Budget

Planned Budget is the original budget prepared by the company at the beginning of the operating by estimating the cost and revenue for the priod.

Lavage Rapide
Planning Budget
For the Month Ended August 31
Number of Cars Washed	8,300 Cars
Revenue (8300 Cars * $6.20)	$51,460
Expenses:
Cleaning Supplies (0.7*8300)	$5,810
Electricity (1100 + 0.07*8300)	$1,681
Maintenance (8300*0.15)	1245
Wages and salaries (4900 + 8300*0.3)	7390
Depreciation	8100
Rent	1900
Administrative expenses (1800 + 8300*.02)	1966
Total expense	$28,092
Net operating income	$23,368

Flexible Budget is the budget prepared by the company on the basis of actual achieved activity but at standard cost in order to compare the budget with actual.

Lavage Rapide
Flexible Budget
For the Month Ended August 31
Number of Cars Washed (Actual)	8400 Cars
Revenue (8400 Cars * $6.20)	$52,080
Expenses:
Cleaning Supplies (0.7*8400)	$5,880
Electricity (1100 + 0.07*8400)	$1,688
Maintenance (8400*0.15)	1260
Wages and salaries (4900 + 8400*0.3)	7420
Depreciation	8100
Rent	1900
Administrative expenses (1800 + 8400*.02)	1968
Total expense	$28,216
Net operating income	$23,864

Lavage Rapide
Flexible Budget Performance Report
	Actual Result	Revenue and Spending Variance		Flexible Budget	Activity Variance		Planned Budget
Number of Cars Washed	8400 Cars	-		8400 Cars	100	U	8,300 Cars
Revenue	$53,560	$1,480	F	$52,080	$620	F	$51,460
Expenses:
Cleaning Supplies	$6,310	$430	U	$5,880	$70	U	$5,810
Electricity	$1,651	$37	F	$1,688	$7	U	$1,681
Maintenance	$1,485	$225	U	$1,260	$15	U	$1,245
Wages and salaries	$7,750	$330	U	$7,420	$30	U	$7,390
Depreciation	$8,100	$0	NONE	$8,100	$0	NONE	$8,100
Rent	$2,100	$200	U	$1,900	$0	NONE	$1,900
Administrative expenses	$1,866	$102	F	$1,968	$2	U	$1,966
Total expense	$29,262	$1,046	U	$28,216	$124	U	$28,092
Net operating income	$24,298	$434	F	$23,864	$496	F	$23,368

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