Answered Essay: Problem 9-21 Critique a Report; Prepare a Performance Report [LO9-1, LO9-4, LO9-6]

Problem 9-21 Critique a Report; Prepare a Performance Report [LO9-1, LO9-4, LO9-6]

TipTop Flight School offers flying lessons at a small municipal airport. The school’s owner and manager has been attempting to evaluate performance and control costs using a variance report that compares the planning budget to actual results. A recent variance report appears below:

 

TipTop Flight School
Variance Report
For the Month Ended July 31
Actual
Results
Planning
Budget
Variances
  Lessons 185 180
  Revenue $ 41,490 $ 40,500 $ 990 F
  Expenses:
     Instructor wages 11,520 11,340 180 U
     Aircraft depreciation 6,845 6,660 185 U
     Fuel 3,710 3,240 470 U
     Maintenance 3,260 3,150 110 U
     Ground facility expenses 2,420 2,510 90 F
     Administration 4,290 4,380 90 F
  Total expense 32,045 31,280 765 U
  Net operating income $ 9,445 $ 9,220 $ 225 F

 

After several months of using such variance reports, the owner has become frustrated. For example, she is quite confident that instructor wages were very tightly controlled in July, but the report shows an unfavorable variance.

 

The planning budget was developed using the following formulas, where q is the number of lessons sold:

 

Cost Formulas
  Revenue $225q
  Instructor wages $63q
  Aircraft depreciation $37q
  Fuel $18q
  Maintenance $ 630 + $14q
  Ground facility expenses $1,610 + $5q
  Administration    $4,200 + $1q

Expert Answer

 

Solution

Performance report:

Actual results Revenue and

spending variance

Flexible budget activity

Variance

Planning budget
Lessons 185 185 180
Revenue $41490 $135 U $41,625

(225×185)

$1125 F $40500
Expenses:
Instructor wages $11,520 $135 F $11,655

(185×63)

$315 U $11,340
Aircraft depreciation $6,845 0 $6,845

(185×37)

$185 U $6,660
Fuel $3,710 $380 U $3330

(185×18)

$90 U $3,240
Maintainance $3260 $40 U $3220

($630+(185×14))

$70 U $3150
Ground facility expenses $2420 $115 F $2535

[1610+(185×5)]

$25 U $2510
Administration $4290 $95 F $4385

[4200+(185×1)]

$5 U $4380
Total expenses $32045 $75 U $31970 $690 U $31280
Net operating income $9445 $210 U $9655 $435 F $9220
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