Kim and Tim Landry started College Painters in 1988 when they were seniors in college. Fully bonded and insured, College Painters specializes in faux finishes using techniques such as sponging, washing, marbleizing, and ragging. While Kim and Tim used to do all of the painting themselves, they now manage the business, employing a mix of college students and other individuals who have some experience and interest in decorative painting. Kim and Tim also provide extensive training in faux finishing techniques to all of their employees and routinely visit worksites to ensure that jobs meet their quality standards.
Kim and Tim budget for 25,000 square feet of business a month. The average job is 500 square feet, and, for such a job, Kim and Tim expect to incur the following costs:
Materials (paint) 1.6 gallons @ $25.00 per gallon
Materials (supplies) $10.00
Labor (includes surface preparation and
applying the paint and the faux finish) 16 hours @$15.00 per hour

To arrive at a selling price, Kim and Tim mark up the budgeted paint cost by 50% and the budgeted labor cost by 100% and add the budgeted cost of supplies. Thus, the starting point for constructing a bid is $550 = (1.50 × 1.6 × $25) + (2.00 × 16 × $15) + $10. Of course, Kim and Tim adjust this starting price to reflect prevailing market conditions and so on. For instance, they will charge more for a rush job, or they will give a discount if the customer is unhappy with the final product. Finally, Kim and Tim budget to pay a total of $2,000 per month in fixed costs related to office rent, utilities, advertising, and the company car.
For August of the most recent year, College Painters earned $25,333 in revenue for several different jobs totaling 24,000 square feet. College Painters used 72 gallons of paint and 765 hours of labor during August. The 765 hours of labor cost Kim and Tim $11,475, which includes the 32 hours it took to clean up the mess in a customer’s home because an employee accidentally tipped over a full can of paint.
According to the bill from the hardware store, Tim and Kim spent $2,160 on paint and $480 on painting supplies during August. The bill for paint was higher than normal because Kim and Tim decided to try a newer, more expensive paint in the hope that it would lead to improved paint and labor efficiencies (Tim and Kim did not expect this decision to affect the amount of supplies used). Finally, Kim and Tim spent $2,250 for the month on fixed costs.

Required:
a. What was College Painters’ master budget profit and actual profit for August? What was College Painters’ total profit variance?
b. Prepare a budget reconciliation report for College Painters for August. Your report should include all of the variances that make up the total profit variance. For this part, do not consider the costs of the accident separately.
c. Considering each variance, determine Kim and Tim’s costs related to the accident involving the spilled can of paint. Separate the costs relating to the accident into out-of-pocket and opportunity costs. Revise your budget reconciliation report to highlight the cost of the accident.
d. Did switching paint increase College Painters’ profit in August? Which variances help you in assessing the quality of this decision?
e. Prepare a brief memo evaluating College Painters’ performance in August vis-à-vis their budgeted performance.