Flexible and static budgets, service company. Avanti Transportation Company executives have had trouble interpreting operating performance for several years. The company has used a budget based on detailed expectations for the forthcoming quarter. For example, the condensed performance report for a Western branch for the most recent quarter was as follows:

Actual Result Budget Variance Revenue $11,400,000 $12,000,000 $600,000 U Variable costs:

Fuel 1,183,200 1,200,000 16,800 F Repairs and maintenance 117,600 120,000 2,400 F Supplies and miscellaneous 235,200 240,000 4,800 F Variable labour payroll 6,600,000 6,840,000 240,000 F Total variable costs’^ 8,136,000 8,400,000 264,000 F Fixed costs:

Supervision 240,000 240,000 0 Rent 240,000 240,000 0 Amortization 1,920,000 1,920,000 0 Other fixed costs 240,000 240,000 0 Total fixed costs 2,640,000 2,640,000 0 Total costs 10,776,000 11,040,000 264,000 F Operating income $ 624,000 $ 960,000 $336,000 U

*U = unfavourable; F = favourable.

Tor purposes ofthis analysis, assume that all these variable costs are purely variable (in relation to revenue dollars). Also assume that the prices and mix ofservices sold remain unchanged.

Although the branch manager was upset about the unfavourable revenue variance, he was happy that his cost performance was favourable; otherwise his operating income would have been even lower. His immediate superior, the vice-president for operations, was totally unhappy and remarked:

I can see some merit in comparing actual performance with budgeted performance, because we can see whether actual revenue coincided with our best guess for budget purposes. But I can’t see how this performance report helps us evaluate the cost control performance of the branch manager.

Required 1. Prepare a columnar flexible budget for Avanti at revenue levels of $10.8 million,

$12 million, and $13.2 million. Use the format of Exhibit 7-2

(p. 246). Assume that the prices and mix of products sold are equal to the budgeted prices and mix.

2. Express the flexible budget for costs in formula form.

3. Prepare a condensed contribution format income statement showing the static-budget, sales-volume, and flexible-budget variances. Use the format ofExhibit 7-3

(p. 247).