The Munchkin Theater is a nonprofit organization devoted to staging theater productions of plays for children in Toronto, Canada. The theater has a very small full-time professional administrative staff. Through a special arrangement with the actors€™ union, actors and directors rehearse without pay and are paid only for actual performances.
During 2006, The Munchkin Theater had five different productions€”each of which was performed 12 times. The costs of 2006€™s operations were as follows:

Some of the costs vary with the number of productions, some with the number of performances, and some are relatively fixed and depend on neither the number of productions nor the number of performances. The costs of scenery, costumes, props, and publicity vary with the number of productions.
It doesn€™t make any difference how many times Peter the Rabbit is performed, the cost of the scenery is the same. Likewise, the cost of publicizing a play with posters and radio commercials is the same whether there are 10, 20, or 30 performances of the play. On the other hand, the wages of the actors, directors, stagehands, ticket booth personnel, and ushers vary with the number of performances. The greater the number of performances, the higher the wage costs will be. Similarly, the costs of renting the hall and printing the programs will vary with the number of performances. Administrative expenses are more difficult to pin down, but the best estimate is that approximately 75% of these costs are fixed, 15% depend on the number of productions staged, and the remaining 10% depend on the number of performances.
At the end of 2006, the board of directors of the theater authorized changing the theater€™s program in 2007 to four productions, with 16 performances each. Actual costs for 2007 were higher than the costs for 2006. (Grants from donors and ticket sales were also correspondingly higher.) Data concerning 2007€™s operations appear below:

Even though many of the costs above may be considered direct costs rather than overhead, the flexible budget approach covered in the chapter can be used to evaluate how well these costs are controlled. The principles are the same whether a cost is a direct cost or is overhead.

Required:
1. Use the actual results from 2006 to estimate the cost formulas for the flexible budget for The Munchkin Theater. Keep in mind that the theater has two measures of activity€”the number of productions and the number of performances.
2. Prepare a performance report for 2007 using the flexible budget approach and both measures of activity. Assume inflation was insignificant. (Note: To evaluate administrative expenses, first determine the flexible budget amounts for the three elements of administrative expenses. Then compare the total of the three elements to the actual administrative expense of $41,650.)
3. If you were on the board of directors of the theater, would you be pleased with how well costs were controlled during 2007? Why or why not?
4. The cost formulas provide figures for the average cost per production and average cost per performance. How accurate do you think these figures would be for predicting the cost of a new production or of an additional performance of a particularproduction?

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The Munchkin Theater Cost Report For the Year Ended 31 December 2006 Number of productions Number of performances of each production 12 60 Actual costs incurred: Actors and directors' wages $144,000 Stagehands' wages . . Ticket booth personnel and ushers'wages Scenery, costumes, and props Theater hallrent .. Printed programs Publicity Administrative expenses Total actual cost incurred 27,000 ....10,800 43,000 45,000 10,500 13,000 43,200 $336,500 The Munchkin Theater Cost Report For the Year Ended 31 December 2007 Number of productions Number of performances of each production 16 64 Actual costs incurred: Actors and directors' wages $148,000 Stagehands wages... Ticket booth personnel and ushers'wages Scenery, costumes, and props Theater hallrent .. Printed programs Publicity.12,000 Administrative expenses Total actual cost incurred $342,400 28,600 12,300 39.300 49,600 ..10,950 41.650