Exchange Corp. is a company that acts as a facilitator in tax-favored real estat

Question

Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below:

  

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $257 per exchange completed on the planning budget; whereas, the average actual office expense is $135 per exchange completed.  

Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depreciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $5,050.

All of the company’s revenues come from fees collected when an exchange is completed.

Required:  

1. Is the report prepared by the bookkeeper useful as a performance report?

  

2. Complete a performance report that would help the owner/manager assess the performance of the company in May. (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.)

Exchange Corp
Analysis of Revenues and Costs
For the Month Ended May 31 Actual
Unit Revenues
and Costs Planning Budget
Unit Revenues
and Costs Variances Exchanges completed 30 25 Revenue $ 635 $ 710 $ 75 U Expenses: Legal and search fees 257 235 22 U Office expenses 135 257 122 F Equipment depreciation 25 30 5 F Rent 75 90 15 F Insurance 15 18 3 F Total expense 507 630 123 F Net operating income $ 128 $ 80 $ 48 F

Explanation / Answer

1. No.

2. Exchange Corp.

Flexible Budget Performance Report

For the month ended May 31

Actuals Spending Variances Flexible Budget Volume Variances Planning Budget Number of Exchanges 30 30 25 Revenue $19,050 $ 2,250 U $ 21,300 $ 3,550 F $ 17,750 Expenses: Legal and Search Fees 7,710 660 U 7,050 1,175 U 5,875 Office Expense 4,050 2,650 F 6,700 275 U 6,425 Equipment Depreciation 750 None 750 None 750 Rent 2,250 None 2,250 None 2,250 Insurance 450 None 450 None 450 Total Expenses $ 15,210 $ 1,990 F $ 17,200 $ 1,450 U 15,750 Net Operating Income $ 3,840 $ 260 U $ 4,100 $ 2,100 F $ 2,000

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