Flaming Foliage Sky Tours is a small sightseeing tour company in New Hampshire.
ID: 2532000 • Letter: F
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.
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.
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.
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.)
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".)
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 UExplanation / Answer
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
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