Question

EXERCISE 9–2 Activity Variances LO9–2 Flight Café prepares in-flight meals for airlines in its kitchen located next to a local airport. The company’s planning budget for July appears below:

Flight Café Planning Budget For the Month Ended July 31
Budgeted meals (q) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18,000
Revenue ($4.50q) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$81,000
Expenses:
Raw materials ($2.40q) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	43,200
Wages and salaries ($5,200 + $0.30q) . . . . . . . . . . . . . . . . Utilities ($2,400 + $0.05q) . . . . . . . . . . . . . . . . . . . . . . . . . . . Facility rent ($4,300) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10,600
	3,300
	4,300
Insurance ($2,300) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,300
Miscellaneous ($680 + $0.10q) . . . . . . . . . . . . . . . . . . . . . .	2,480
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	66,180
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$14,820

In July, 17,800 meals were actually served. The company’s flexible budget for this level of activity appears below:

Flight Café Flexible Budget For the Month Ended July 31
Budgeted meals (q) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17,800
Revenue ($4.50q) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$80,100
Expenses:
Raw materials ($2.40q) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	42,720
Wages and salaries ($5,200 + $0.30q) . . . . . . . . . . . . . . . . Utilities ($2,400 + $0.05q) . . . . . . . . . . . . . . . . . . . . . . . . . . . Facility rent ($4,300) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10,540
	3,290
	4,300
Insurance ($2,300) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,300
Miscellaneous ($680 + $0.10q) . . . . . . . . . . . . . . . . . . . . . .	2,460
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	65,610
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$14,490

Required:

1. Calculate the company’s activity variances for July. (Hint: Refer to Exhibit 9–6.) 2. Which of the activity variances should be of concern to management? Explain.

Answer 1

Activity Variance analysis for any company can be classified into following heads:-

1. Sales Variance

2.Material Variance

3.Labour Variance

4.Fixed overhead Variance

5.Variable Overhead Variance

Now, solving the variances step by step as follows:-

1. Sales Variance :- It is the difference between the actual sales and budgeted sales of an organization.

Formula:- (Budgeted Quantity * Budgeted price) - (Actual Quantity * Actual price)

= (18000 * 4.5) - (17800 * 4.5) = 900(Adverse)

2. Material Variance:- (Standard Cost- Actual Cost) = ( Standard Qty. for actual output * standard price) - (Actual Qty. * Actual Price)

= (18000 * 2.4 ) - (17800 * 2.4) = 480 (Adverse)

3.Labour Variance:- (Standard Wages- Actual Wages)= (10600-10540) = 60(Favourable)

4.Overhead variance:- As there is no categorisation of Overheads into Fixed and Variable, So we will take all the overheads together.

(Budgeted overhead - Actual overhead) = (12380-12350)= 30(Favourable)

Out of these activity Variances, the Sales and Material variance should be most concern to the management because they are coming adverse which suggest that the Flight Cafe incurred high material cost compared to its Budgeted Sales. The Actual sales has also been less than from the Budgeted Sales but even then the material cost is high which is not balancing and thus, the management should take proper measures to improve its sales and reduce its costs to achieve higher benefits.