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	$	580		$	620		$	40	U
Expenses:
Legal and search fees		203			190			13	U
Office expenses		193			230			37	F
Equipment depreciation		24			30			6	F
Rent		60			75			15	F
Insurance		12			15			3	F
Total expense		492			540			48	F
Net operating income	$	88		$	80		$	8	F

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $230 per exchange completed on the planning budget; whereas, the average actual office expense is $193 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 $4,500.

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?

	Yes
	No

  

2. Complete a performance report that would help the owner/manager assess the performance of the company in May. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

No,this is not useful as a performance report
2
	Actual	Revenue and spending variances		Flexible budget	Activity variances		Planning budget
Exchanges completed	25			25			20
Revenue	14500	1000	U	15500	3100	F	12400
Expenses:
Legal and search fees	5075	325	U	4750	950	U	3800
Office expenses	4825	200	U	4625	25	U	4600
Equipment depreciation	600	0	None	600	0	None	600
Rent	1500	0	None	1500	0	None	1500
Insurance	300	0	None	300	0	None	300
Total expense	12300	525	U	11775	975	U	10800
Net operating income	2200	1525	U	3725	2125	F	1600