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	251	235	16 F
Revenue	$90,000	$65,800	$24,200 F
Variable Costs (fuel)	22,343	21,150	1,193U
Contribution Margin	$67,657	$44,650	$23,007F
Fixed cost(wages & facility rent)	25,000	24,300	700U
Operating Income	$42,657	$20,350	$22,307F

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 5%. She has asked you to review the report.

Required:

1. What is the amount of operating income that will appear on the flexible budget for April 2020?
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.

Answer 1

	Flexible Budget
Lessons	251
Revenue ($65,800/235*251)	$70,280
Variable costs ($21,150/235*251)	22,590
Contribution margin	47,690
Fixed cost	24,300
Operating income	$23,390

Operating income as per Flexible budget = $23,390

2.

Amount by which profit changed due to change in activity level = Flexible budget - Planning budget

Amount by which profit changed due to change in activity level = $23,390 - 20,350

Amount by which profit changed due to change in activity level = $3,040 F

3.

Variable cost spending variance = Actual results - Flexible budget

Variable cost spending variance = $22,343 - $22,590 = $247 F

As per results provided by spending variance, variable cost has not been poorly controlled as it shows favorable results. Hence the owner is not correct