Biter Framing's cost formula for its supplies cost is $950 per month plus $8 per frame. For the month of June, the company planned for activity of 515 frames, but the actual level of activity was 510 frames. The actual supplies cost for the month was $5,220.

Terms to know:

Planning Budget: A budget that is created at the beginning of the period that is valid for the planned level of activity. Refer to “static budget”. It answers the question “What is planned (expected) to be?”

Flexible Budget: What should revenues and costs should have been when given the actual level of activity. It answers the question “What is supposed to be given the actual level of activity?”

Activity Variance: The differences between the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget. – “The difference between what happened and what supposed to be happen, given the actual level of activity”.

Revenue variance: the different between the actual revenue and how much the revenue should have been given the actual level of activity. It is either favorable (F) or unfavorable (U).

Spending Variance: the difference between the actual cost and how much the cost should have been given the actual level of activity. It is either favorable (F) or unfavorable (U).  

Please use the formula to solve the questions below: Cost = Fixed Cost + Variable Cost per unit x Q

1)     Biter Framing's cost formula for its supplies cost is $950 per month plus $8 per frame. For the month of June, the company planned for activity of 515 frames, but the actual level of activity was 510 frames. The actual supplies cost for the month was $5,220.

a.      What is planning budget total supply cost?

Cost = Fixed Cost + Variable Cost per unit x Q

The supply cost planned to be = $950 + ($8 x 515) = $ 5,070

b.     What is flexible budget total supply cost?

Cost = Fixed Cost + Variable Cost per unit x Q

The supply cost supposed to be:  $950 + ($8 x 510) = $5,030

c.      What is  the cost difference under flexible budget?

What is supposed to be – What actually happened =  $5,030 - $5,220 = - $190

d.      Is  budget difference favorable (F) or unfavorable (U)  : Unfavorable (Spent more than supposed to be)

2) Hamiter Framing's cost formula for its supplies cost is $940 per month plus $7 per frame. For the month of August, the company planned for activity of 372 frames, but the actual level of activity was 375 frames. The actual supplies cost for the month was $3,160.

a.      What is planning budget total supply cost?

    $ 940 + ($ 7 x 372) =  $3,544

b.      What is flexible budget total supply cost?

                $ 940 + ($7 x 375) = $3,565

c.      What is the cost difference under flexible budget?

  $3,565 – $3,160 =  $405  

d.      Is budget difference  favorable (F) or unfavorable (U): F (spent less than supposed to be

Please solve the following questions determining your own way

3) Magliacane Corporation is a service company that measures its output by the number of customers served. The company has provided the following fixed and variable cost estimates that it uses for budgeting purposes.

	Fixed Element per Month			Variable Element per Customer Served
Revenue				$	2,800
Employee salaries and wages	$	43,100		$	600
Travel expenses				$	200
Other expenses	$	21,400

When the company prepared its planning budget at the beginning of February, it assumed that 39 customers would have been served. However, 35 customers were actually served during February.

a.      What would be the revenue in the company's flexible budget for February?

Revenue: $ 2,800 per customer x 35 customers = $,2800 x 35 = $98,000

b.     What would be to “total employee salaries and wages”?

Fixed Costs + variable Costs = $43,100 + ($600 x 35)  = $64,100

c.      What would be the “total travel expenses”?

Variable Cost per customer x number of customers = $200 x 35 = $7,000

d.     What would be the “net profit” of the February?

Revenue – Costs =  $98,000 – ($64,100 + $7,000 + $21,400) =  $5,500

4) Taussig Snow Removal's cost formula for its vehicle operating cost is $1,440 per month plus $284 per snow-day.

For the month of February, the company planned for activity of 14 snow-days, but the actual level of activity was 16 snow-days. The actual vehicle operating cost for the month was $5,370.

a.      Find flexible budget vehicle operating cost?

              Cost = Fixed Cost + Variable Cost per unit x Q

             Vehicle Operating Costs = Fixed Costs + Variable Costs

                                                     = $1,440 + ($284 x 16 days) = $5,984 (what the cost supposed to be) 

b.      Find planning budget vehicle operating cost?

                 Vehicle Operating Costs = Fixed Costs + Variable Costs =

                                                         = $1,440 + ($284 x 14) = $5,416 (What the cost planned to be)

c.       Find the ACTIVITY VARIANCE for vehicle operating cost in February?

   What supposed to be - What actually happened      $5,984 - $5,370 = $614        

d.      Is it is favorable (F) or unfavorable (U): Favorable (Actual cost is less than what supposed to be)

Flexible Budget with Multiple Cost Driver

5) Blue Air uses two measures of activity, (1) flights and (2) passengers, in the cost formulas in its budgets and performance reports. The cost formula for plane operating costs is $43,670 per month plus $2,879 per flight plus $10 per passenger. The company expected its activity in December to be 85 flights and 281 passengers, but the actual activity was 90 flights and 278 passengers. The actual cost for plane operating costs in December was $314,740.

Hint:

The cost drivers are (1) Number of flights (2) Number of passengers in each flight. 

Expected activity level: 85 flights and 281 passengers

Actual activity level:     90 flights and 278 passengers

a.      Find the operating costs in the planning budget

Cost = Fixed Cost + (Variable Cost per unit 1 x Q1 + Variable Cost per unit 2 x Q2)

Plane Operating Costs = $43,670 + [$2,879 x 85) + ($10 x 281 passengers)] = $291,195 

b.     Find the operating costs in the flexible budget

              Operating Costs = $43,670 + [($2,879 x 90 flights) + ($10 x 278 passengers)] = $305,550           

c.      Find the cost difference under flexible budget

What is supposed to be – What actually happened ( $305,550 - $314,740) = $9,190

d.      Is the cost difference favorable (F) or unfavorable (U): Unfavorable (Spent more than it supposed to be).

6) Mandalay Hotel bases its budgets on guest-days. The hotel's static budget for August appears below:

Budgeted number of guest-days		4,300
Budgeted variable costs:
Supplies (@$9.60 per guest-day)	$	41,280
Laundry (@$9.40 per guest-day)		40,420
Total variable cost		81,700
Budgeted fixed costs:
Wages and salaries		57,190
Occupancy costs		52,030
Total fixed cost		109,220
Total cost	$	190,920

What would be the total fixed cost at the activity level of 5,500 guest-days per month?

The answer is not provided! Students are expected to find the answer.