When preparing its planning budget the company estimated that it would serve 40

ID: 2587892 • Letter: W

Question

When preparing its planning budget the company estimated that it would serve 40 customers per month; however, during May the company actually served 45 customers.

A. What net operating income would appear in Adger’s flexible budget for May?

B. What is Adger’s revenue variance for 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.)

C. What is Adger’s employee salaries and wages spending variance for May?

D. What is Adger’s travel expenses spending variance for May?

Fixed Element Variable Element Actual per Customer Served $ 5,400 $ 2,200 $ 530 Total for Mayy $ 226,000 $ 158,700 $ 20,700 $ 38,000 per Revenue Employee salaries and wages Travel expenses Other expenses Month $61,000 $ 40,000

Explanation / Answer

Solution:

Part 1 – net operating income would appear in Adger’s flexible budget for May = $19,150

Flexible budget is a budget prepared at standard or budgeted cost by using actual activity performed by the company during the period. Hence, the amount is calculated by using actual activity 45 Customer Served and taking Standard Cost for Variable manufacturing overhead cost and fixed manufacturing overhead.

Income Statement (Flexible Budget)

Actual Customer Served

Revenue (45 customers x $5400)

$243,000

Variable Costs:

Employee salaries and wages (45*2200)

$99,000

Travel Expenses (45*530)

$23,850

Fixed Costs:

Employee salaries and wages

$61,000

Other Expenses

$40,000

Total Costs

$223,850

Operating Income

$19,150

Part 2 -- Adger’s revenue variance for May

Revenue variance is the difference between Actual Revenue and revenue as per flexible budget.

Revenue Variance = Revenue as per flexible budget – Actual Revenue

= $243,000 - $226,000

= $17,000 Unfavorable

Revenue Variance is Unfavorable because the standard revenue is higher than the actual revenue.

Part 3 -- Adger’s employee salaries and wages spending variance for May

Total Standard Employee salaries and wages = Variable Cost + Fixed Cost

= 99,000 + 61,000

= $160,000

Total Actual Employee salaries and wages = $158,700

Employee salaries and wages Spending Variance = Standard Employee salaries and wages 160,000 – Actual Employee salaries and wages 158,700

= $1,300 Favorable

Employee salaries and wages variance is favorable because the standard cost is higher than the actual cost.

Part 4 -- Adger’s travel expenses spending variance for May

Standard Travel Expenses Spending Variance = Standard Total Travel Expense – Actual Total Travel Expense

= $23,850 - $20,700

= $3,150 Favorable

Favorable because standard cost is higher than actual cost.

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