Fantastic Sky Tours Pty Ltd is a small sightseeing tour company in Sydney that specialises in aerial tours of the New South Wales area. Until recently, the company had not had an accounting department. Routine bookkeeping tasks, such as billing, had been handled by a person who had little formal training in accounting. As the business began to grow, however, the owner recognised the need for more formal accounting procedures. Miranda Jenkins, a CPA, was recently hired as the new management accountant, and she has the authority to hire an assistant.
During her first week on the job, Miranda was given the performance report on the next page. The report was prepared by Robert Smith, the company’s manager of Aircraft Operations, who was planning to present it to the owner, David Lowry, the next morning.
‘Look at these favourable variances for fuel and so forth,’ Robert pointed out as he showed the report to Miranda. ‘My operations people are really doing a great job.’
Later that day, Miranda looked at the performance report more carefully. She immediately realised that it was improperly prepared and would be misleading to the company’s owner.
Fantastic Sky Tours Pty Ltd
Performance Report for the month of April 2020
| Formula
flexible budget (per air-km) |
Actual
(32 000 air-km) |
Static budget
(35 000 air-km) |
Variance | |
| Passenger revenue | $3.50 | $112 000 | $122 500 | $10 500 U |
| Less Variable costs: | ||||
| Fuel | 0.50 | 17 000 | 17 500 | 500 F |
| Aircraft maintenance | 0.75 | 23 500 | 26 250 | 2 750 F |
| Flight crew salaries | 0.40 | 13 100 | 14 000 | 900 F |
| Selling and administration | 0.80 | 24 900 | 28 000 | 3 100 F |
| Total variable expenses | $2.45 | $ 78 500 | $ 85 750 | $ 7 250 F |
| Contribution margin | $1.05 | $ 33 500 | $ 36 750 | $ 3 250 U |
| Less Fixed costs: | ||||
| Depreciation on aircraft | $2 900 | $ 2 900 | $ 2 900 | $ 0 |
| Landing fees | 900 | 1 000 | 900 | 100 U |
| Supervisory salaries | 9 000 | 8 600 | 9 000 | 400 F |
| Selling and administrative | 11 000 | 12 400 | 11 000 | 1 400 U |
| Total fixed expenses | $23 800 | $ 24 900 | $ 23 800 | $ 1 100 U |
| Net profit | $ 8 600 | $ 12 950 | $ 4 350 U |
Required:
- Prepare flexible budgets for the company based on the following activity levels:
- 32 000 air-kilometres.
- 35 000 air-kilometres.
- 38 000 air-kilometres.
- Prepare a revised performance report showing the proper variances for April, based on the flexible budget that you prepared above.
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