Chapter 09s (1)

U unfavorable variance that occurs when actual costs

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U = Unfavorable variance  that occurs when  actual costs are greater than budgeted costs. F = Favorable variance  that occurs when actual  revenue is greater than budgeted revenue.

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9-8 Revenue/Cost Planning Actual Formulas Budget Results Variances Number of lawns (Q) 500 550 Revenue (\$75Q) 37,500 \$ 43,000 \$ 5,500 \$ F Expenses: Wages and salaries (\$5,000 + \$30Q) 20,000 \$ 23,500 \$ 3,500 \$ U Gasoline and supplies (\$9Q) 4,500 5,100 600 U Equipment maintenance (\$3Q) 1,500 1,300 200 F Office and shop utilities (\$1,000) 1,000 950 50 F Office and shop rent (\$2,000) 2,000 2,000 - Equipment Depreciation (\$2,500) 2,500 2,500 - Insurance (\$1,000) 1,000 1,200 200 U Total expenses 32,500 36,550 4,050 U Net operating income 5,000 \$ 6,450 \$ 1,450 \$ F Larry's Lawn Service For the Month Ended June 30 Deficiencies of the Static Planning  Budget Larry’s Actual Results Compared with the Planning Budget Since these variances are   favorable , has Larry  done a good job controlling costs? Since these variances are  unfavorable , has  Larry done a poor job controlling costs?
9-9 I don’t think I can answer the questions using a static budget. Actual activity is above planned activity. So, shouldn’t the variable costs be higher if actual activity is higher? Deficiencies of the Static Planning  Budget

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9-10 § The relevant question is . . . “How much of the cost variances are due to higher activity and how much are due to cost control?” § To answer the question, we must the budget to the actual level of activity Deficiencies of the Static Planning  Budget
9-11 How a Flexible Budget Works     To a budget, we need to know that: Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. Fixed Variable

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9-12 Preparing a Flexible Budget Revenue/Cost Flexible Formulas Budget Number of lawns (Q) 550 Revenue (\$75Q) 41,250 \$ Expenses: Wages and salaries (\$5,000 + \$30Q) 21,500 \$ Gasoline and supplies (\$9Q) 4,950 Equipment maintenance (\$3Q) 1,650 Office and shop utilities (\$1,000) 1,000 Office and shop rent (\$2,000) 2,000 Equipment Depreciation (\$2,500) 2,500 Insurance (\$1,000) 1,000 Total expenses 34,600 Net operating income 6,650 \$ Larry's Lawn Service For the Month Ended June 30 Larry’s Flexible Budget
9-13 Activity Variances Revenue/Cost Planning Flexible Activity Formulas Budget Budget Variances Number of lawns (Q) 500 550 Revenue (\$75Q) 37,500 \$ 41,250 \$ 3,750 \$ F Expenses: Wages and salaries (\$5,000 + \$30Q) 20,000 \$ 21,500 \$ 1,500 \$ U Gasoline and supplies (\$9Q) 4,500 4,950 450 U Equipment maintenance (\$3Q) 1,500 1,650 150 U Office and shop utilities (\$1,000) 1,000 1,000 - Office and shop rent (\$2,000) 2,000 2,000 - Equipment Depreciation (\$2,500) 2,500 2,500 - Insurance (\$1,000) 1,000 1,000 - Total expenses 32,500 34,600 2,100 U Net operating income 5,000 \$ 6,650 \$ 1,650 \$ F Larry's Lawn Service For the Month Ended June 30 Larry’s Flexible Budget Compared with the Planning Budget Activity and revenue increase by 10 percent, but net operating income increases by more than 10 percent due to the presence of fixed costs.

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9-14 Revenue and Spending Variances Flexible budget revenue Actual revenue The difference is a revenue variance.
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