Question

Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below:

Exchange Corp. Analysis of Revenues and Costs For the Month Ended May 31
	Actual Unit Revenues and Costs			Planning Budget Unit Revenues and Costs			Variances
Exchanges completed		25			20
Revenue	$	560		$	600		$	40	U
Expenses:
Legal and search fees		191			180			11	U
Office expenses		181			224			43	F
Equipment depreciation		24			30			6	F
Rent		60			75			15	F
Insurance		12			15			3	F
Total expense		468			524			56	F
Net operating income	$	92		$	76		$	16	F

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $224 per exchange completed on the planning budget; whereas, the average actual office expense is $181 per exchange completed.

Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depreciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $4,400.

All of the company’s revenues come from fees collected when an exchange is completed.

Required:

1. Is the report prepared by the bookkeeper useful as a performance report?

2. Complete the performance report that would help the owner/manager assess the performance of the company in May.

Answer 1

Particulars	Actual	Revenue and spending variance		Flexible budget	Activity variance		Static budget
Units	25			25			20
Revenue	14000	1000	U	15000	3000	F	12000
Expenses
Legal and search fees	4775	275	U	4500	900	U	3600
Office expense	4525	25	U	4500	20	U	4480
Equipment depreciation	600	0		600	0		600
Rent	1500	0		1500	0		1500
Insurance	300	0		300	0		300
Total expense	11700	300	U	11400	920	U	10480
Net operating income	2300	1300	U	3600	2080	F	1520