Question

Cost Data:

Cleaning supplies                $1.80q

Electricity           $1,200 +   $.15q

Rent        $8,000

Larry expects to wash 9,000 cars at an average price of $4 per wash in August.

1. what is Larry planned budget?

2. Larry actually washes 8,800 cars in August. What’s Larry’s flexible budget?

Actual Results (8,800 washes)

Revenue $34,900

Cleaning supplies             17,300

Electricity     2,670

Rent     8,000

Total Expense

Operating income         $ 6,930

Prepare a flexible budget performance report that shows the activity variances and the revenue and spending variances for August.

Answer 1

Solution:

Part 1 – Planned Budget

Planning Budget is the master budget prepared at the beginning of period by using the company’s expected activity for the period at standard cost.

Planning Budget
Revenue (9,000 Cars x $4)	$36,000
Expenses:
Cleaning Supplies ($1.8*9000)	$16,200
Electricity ($1200 fixed + $0.15*9000)	$2,550
Rent	$8,000
Total expense	$26,750
Net Operating Income	$9,250

Part 2 – Flexible Budget Performance Report

Flexible Budget Performance Report
	Actual Result	Revenue and Spending Variance		Flexible Budget (Refer Note 1)	Activity Variance		Planned Budget
Revenue	$34,900	$300	U	$35,200	$800	U	$36,000
Expenses:
Cleaning Supplies	$17,300	$1,460	U	$15,840	$360	F	$16,200
Electricity	$2,670	$150	U	$2,520	$30	F	$2,550
Rent	$8,000	$0	None	$8,000	$0	None	$8,000
Total expense	$27,970	$1,610	U	$26,360	$390	F	$26,750
Net Operating Income	$6,930	$1,910	U	$8,840	$410	U	$9,250

Note 1 – Flexible Budget

Flexible Budget is the budget prepared on the basis of actual activity performed by the company over the period at standard cost.

Flexible Budget
Revenue (8800 x $4)	$35,200
Expenses:
Cleaning Supplies ($1.8*8800)	$15,840
Electricity ($1200 fixed + $0.15*8800)	$2,520
Rent	$8,000
Total expense	$26,360
Net Operating Income	$8,840

Note - Revenue and Spending Variance

Revenue and Spending Variance is the difference between the actual result and the flexible result.

Flexible Budget is the budget prepared at standard / budgeted cost at the given actual level of activity for the period.

Note – Activity Variance

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

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