Question

Sky Flights offers flying lessons at the Iowa City Airport. The owner prepared the following report about the month of April 2020. Actual Planning Budget Variance Lessons 230 195 35 F Revenue $65,120 $58,000 $7,120 F Variable Costs (fuel) $19,962 $17,600 $2,362 U Contribution Margin $45,158 $40,400 $4,758 F Fixed cost(wages & facility rent) 23,000 22,500 500 U Operating Income $22,158 $17,900 $4,258 F The owner is pleased that the overall operating income is higher than planned, but quite concerned that actual variable costs exceeded the budgeted amount by over 15%. She has asked you to review the report.

1. What is the amount of operating income that will appear on the flexible budget for April 2020? (Do not round the intermediate calculation. Round the final answer to the nearest dollar.)
2. Compute the amount by which profit changed simply due to a change in activity level(in other words, compute the total activity variance). Use the standard "F" or "U" notation to indicate the direction of the change.
3. Is the owner correct in believing that variable costs are poorly controlled? Support your answer by computing the variable cost spending variance. Use the standard "F" or "U" notation to indicate the direction of the change. (Do not round the intermediate calculation. Round the final answer to the nearest dollar.)

Answer 1

1.

Flexible Budget
Lessons	230
Revenue ($58,000/195*230)	$68,410
Variable cost ($17,600/195*230)	20,759
Contribution margin	47,651
Fixed cost	22,500
Operating income	$25,151

2.

	Flexible Budget	Planning Budget	Activity variance
Lessons	230	195
Revenue ($58,000/195*230)	$68,410	$58,000	$10,410	F
Variable cost ($17,600/195*230)	20,759	17,600	3,159	U
Contribution margin	47,651	40,400	7,251	F
Fixed cost	22,500	22,500	0
Operating income	$25,151	$17,900	$7,251	F

Total activity variance = $7,251 F

3.

Variable cost spending variance = Actual results - Flexible budget

Variable cost spending variance = $19,962 - $20,759 = $797 Favorable

No, the owner is not correct as the variable costs have been properly controlled and are favorable as per above results.