Burton Transportation Company’s general manager reports quarterly to the company president on the firm’s operating performance. The company uses a budget based on detailed expectations for the forthcoming quarter. The general manager has just received the condensed quarterly performance report shown in Exhibit 8.10.

Exhibit 8.10

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

The president was not satisfied with the performance report 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 Burton Transportation at revenue levels of €7,200,000, €8,000,000 and €8,800,000. Use the format of the last three columns of Exhibit 8.2, p. 333. Assume that the prices and mix of products sold are equal to the budgeted prices and mix.

Exhibit 8.2

2. Write out the flexible budget formula for costs as a function of revenue.

3 Prepare a condensed table showing the static budget variance, the sales-activity variance and the flexible-budget variance. Use the format of Exhibit 8.5, p. 336.

Exhibit 8.5

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Net revenue Variable costs Fuel Repairs and maintenance Supplies and miscellaneous Variable payroll Total variable costs* Fixed costs Supervision Rent Depreciation Other fixed costs Total fixed costs Total fixed and variable costs Operating income Budget €8,000,000 € 160,000 80,000 800,000 5,360,000 €6,400,000 € 180,000 160,000 480,000 160,000 980,000 €7,380,000 € 620,000 Actual €7,600,000 € 157,000 85,000 788,000 5,200,000 €6,230,000 € 183,000 160,000 480,000 158,000 981,000 €7,211,000 €389,000 Variance € 400,000 U € 3,000 F 5,000 U 12,000 F 160,000 F € 170,000 F € 3,000 U 2,000 F € 1,000 U €169,000 F €231,000 U U = Unfavourable. F= Favourable. *For purposes of this analysis, assume that all of these costs are totally variable with respect to sales revenue. In practice, many are mixed and would have to be subdivided into variable and fixed components before a meaningful analysis could be made. Also, assume that the prices and mix of services sold remain unchanged.