Question 4 Flexible budget and variance analyses (20 marks) Part A [Flexible budget] Goldman Smith Sky Tours is a small sightseeing tour company in Auckland, specialising in aerial tours in Auckland area. With the growth of the business, Goldman, the owner, recognised the need to upgrade his simple book keeping measures to more formal accounting procedures. He hired Adam Frost as the new accountant for this reason. During his first week on the job, Adam Frost was given the performance report below. The report was prepared by Sham Scott, the company's manager of Aircraft Operations, who was planning to present it to the owner next morning. 'Look at these favourable variances for fuel and so forth,' Sham pointed out as he showed the report to Adam. 'My operations people are really doing a great job.' Later that day, Adam looked at the performance report more carefully. He immediately realised that it was improperly prepared and would mislead the company owner. The report was as follows: Goldman Smith Sky Tours Performance Report September Cost and Static revenue Actual budget Formulas (per (16 000 (17,500 air-km) air-km) air-km) Variance Passenger revenue $3.50 $56 000 $61,250 $5,250 U Less Variable expenses: Fuel 0.50 8.500 8,750 250 F Aircraft maintenance 0.75 11,750 13,125 1375 F Flight crew salaries 0.40 6, 550 7,000 450 F Selling and administration 0.80 12,450 14 000 1550 F Total variable expenses $2.45 $ 39,250 $ 42,875 $ 3625 F Contribution margin $1.05 $ 16,750 $ 18,375 $ 1625 U Less total fixed expenses $11,900 $ 12,450 $ 11,900 $ 550 U Net profit $ 4300 $ 6,475 $ 2,175 U