1.UC Cars operates a fleet of cars for hire in Singapore. In planning its operat

Question

1.UC Cars operates a fleet of cars for hire in Singapore. In planning its operations for February, UC Cars estimated that it would carry fare-paying passengers for 40,000 km at an average price of $2.00 per km. Past experience suggested that the total mileage (km run) should amount to 250% of the fare-paid km. At the beginning of October, UC Cars employed ten drivers and decided that this number would be adequate for the month ahead.
The following cost estimates were available:

In February, revenue of $ 72,200 was generated by carrying fare paying passengers for 38,000 km. The total actual km run was 105,000 km. Other costs incurred for the month were:

Savings from the employment cost of drivers was due to one driver leaving during the month; she was not replaced until early March.

Required:
(a) Prepare a columnar income statement showing the actual income, static budget income and flexible budget income for October. Indicate on your income statement the total operating income variance.

(b) Using a flexible budgeting approach, construct a set of detailed variances to explain the total operating income variance as effectively as possible. Present your variance analysis in a report to the owner of UC Cars. Include in your report suggested reasons for the variances.

(c) Suggest any further variances that could be computed to explain the operating performance of UC Cars. Outline the additional information that your suggested variances could provide to the owner of UC Cars.

Employment costs of a driver $ 2,000 per month Fuel costs $ 0.16 per km run Variable overhead costs $ 0.10 per km run Fixed overhead costs $ 18,000 per month

Explanation / Answer

(a) Income Statement Particulars Actual income Static Income Flexible income Income    72200 80000 76000 Less: employmenyt cost 19200 20000 20000 Fuel cost 17640 16000 15200 variable cost 10080 10000 9500 fixed oh cost 18600 18000 18000 Net income 6680 16000 13300 variance = 6680-13300                    =6620 unfavorable (b) Variance Particulars Income as per flexible budget 13300 Selling price variance (2.0-1.9)*38000 -3800 Employment less use in actual 800 Fuel price variance (0.16-0.168)*105000 -840 Fuel qty variance (95000-105000)*.16 -1600 Fixed oh variance -600 Variable cost price variance (0.1-0.096)*105000 420 Variable qty variance (95000-105000)1 -1000 profit actual 6680

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