Kronos Shipping Company’s general manager reports quarterly to the company’s president on the firm’s operating performance. The company has used a budget based on detailed expectations for the forthcoming quarter. For example, the condensed performance report for a recent quarter (in dollars) was 

* For purposes of this analysis, assume that these costs are totally variable with respect to sales revenue. In practice, many are mixed and have to be subdivided into variable and fixed components before a meaningful analysis can be made. Also assume that the prices and mix of services sold remain unchanged.

Although the general manager was upset about not obtaining enough revenue, she was happy that her cost performance was favourable; otherwise, her net operating income would be even worse. 

The president was totally unhappy and remarked: “I can see some merit in comparing actual performance with budgeted performance, because we can see whether actual revenue coincided with our best guess for budget purposes. But I can’t see how this performance report helps me evaluate cost-control performance.

1. Prepare a columnar flexible budget for Kronos Shipping at revenue levels of $7,000,000, $8,000,000, and $9,000,000. Use the format of the last three columns of Exhibit 12-2. Assume that the prices and mix of products sold are equal to the budgeted prices and mix. 

2. Express the flexible budget for costs in formula form. 

3. Prepare a condensed table showing the static (master) budget variance, the sales activity variance, and the flexible-budget variance. Use the format of Exhibit 12-5. 

4. Evaluate cost-control performance for the president.

Transcribed Image Text:

Budget $ 8,000,000 $7,600,000 $400,000 U Actual Variance Net revenue Fuel 160,000 157,000 3,000 F Repairs and maintenance Supplies and miscellaneous Variable payroll 80,000 78,000 2,000 F 800,000 788,000 12,000 F 5,360,000 5,200,000 160,000 F Total variable costs* 6,400,000 6,223,000 177,000 F Supervision 160,000 164,000 4,000 U 160,000 Rent 160,000 Depreciation 480,000 480,000 Other fixed costs 160,000 158,000 2,000 F Total fixed costs 2,000 U 960,000 962,000 Total costs charged against 7,360,000 7,185,000 175,000 F revenue $ 640,000 $ 415,000 $ 225,000 U Operating income U = Unfavourable F = Favourable