Chapter 09s (1)

# Variances budget variances results number of lawns q

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Variances Budget Variances Results Number of lawns (Q) 500 550 550 Revenue (\$75Q) 37,500 \$ 3,750 \$ F 41,250 \$ 1,750 \$ F 43,000 \$ Expenses: Wages and salaries (\$5,000 + \$30Q) 20,000 \$ 1,500 \$ U 21,500 \$ 2,000 \$ U 23,500 \$ Gasoline and supplies (\$9Q) 4,500 450 U 4,950 150 U 5,100 Equipment maintenance (\$3Q) 1,500 150 U 1,650 350 F 1,300 Office and shop utilities (\$1,000) 1,000 - 1,000 50 F 950 Office and shop rent (\$2,000) 2,000 - 2,000 - 2,000 Equipment Depreciation (\$2,500) 2,500 - 2,500 - 2,500 Insurance (\$1,000) 1,000 - 1,000 200 U 1,200 Total expenses 32,500 2,100 U 34,600 1,950 U 36,550 Net operating income 5,000 \$ 1,650 \$ F 6,650 \$ 200 \$ U 6,450 \$ Larry's Lawn Service For the Month Ended June 30 Flexible Budget Performance Report \$43,000 actual -  \$41,250 budget A Performance Report Combining Activity  and Revenue and Spending Variances

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9-21 More than one cost  driver may be needed to adequately explain all of the costs in an organization.  The cost formulas used to prepare a flexible budget can be adjusted to recognize multiple cost drivers. Flexible Budgets with Multiple Cost  Drivers
9-22 Because of the large unfavorable wages and salaries spending variance, Larry decided to add an additional cost driver for wages  and salaries.  The variance is due primarily to the number of  hours required for the additional edging and trimming.  So Larry  estimates the additional hours and builds those hours into both  his revenue and expense budget formulas. Larry’s New Budget Flexible Budgets with Multiple Cost  Drivers

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9-23 Flexible Budgets with Multiple Cost  Drivers Revenue/Cost Flexible Formulas Budget Number of lawns (Q) 550 Numer of hours (H) 100 Revenues (\$75Q + \$30H) 44,250 \$ Expenses: Wages and salaries (\$5,000 + \$30Q + \$25H) 24,000 \$ 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 37,100 Net operating income 7,150 \$ Larry's Lawn Service For the Month Ended June 30 Larry’s Budget Based on More than One Cost Driver
9-24 Some Common Errors The most common errors when preparing performance reports are to implicitly assume that: 1. All costs are fixed, or that; 2. All costs are variable. Assume all costs are fixed.

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9-25 Common Error 1:  Assuming All  Costs Are Fixed Planning Actual Budget Results Variances Number of lawns 500 550 Revenue 37,500 \$ 43,000 \$ 5,500 \$ F Expenses: Wages and salaries 20,000 \$ 23,500 \$ 3,500 \$ U Gasoline and supplies 4,500 5,100 600 U Equipment maintenance 1,500 1,300 200 F Office and shop utilities 1,000 950 50 F Office and shop rent 2,000 2,000 - Equipment Depreciation 2,500 2,500 - Insurance 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 Faulty Analysis Comparing Budgeted Amounts to Actual Amounts
9-26 Common Error 2:  Assuming All  Costs Are Variable Planning Planning Budget Actual Budget × 110% Results Variances Number of lawns 500 550 Revenue 37,500 \$ 41,250 \$ 43,000 \$ 1,750 \$ F Expenses: Wages and salaries 20,000 \$ 22,000 \$ 23,500 \$ 1,500 \$ U Gasoline and supplies 4,500 4,950 5,100 150 U Equipment maintenance 1,500 1,650 1,300 350 F Office and shop utilities 1,000 1,100 950 150 F Office and shop rent 2,000 2,200 2,000 200 F Equipment Depreciation 2,500 2,750 2,500 250 F
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