1) Flaming Foliage Sky Tours is a small sightseeing tour company in New Hampshire.
2) Mark Fletcher, president of SoftGro, Inc.,
Flaming Foliage Sky Tours is a small sightseeing tour company in New Hampshire. The firm specializes in aerial tours of the New England countryside during September and October, when the fall color is at its peak. Until recently, the company had not had an accounting department. Routine bookkeeping tasks, such as billing, had been handled by an individual who had little formal training in accounting. As the business began to grow, however, the owner recognized the need for more formal accounting procedures. Jacqueline Frost has recently been hired as the new controller, and she will have the authority to hire an assistant. During her first week on the job. Frost was given the following performance report. The report was prepared by Red Leif, the company's manager of aircraft operations, who was planning to present it to the owner the next morning. "Look at these favorable variances for fuel and so forth," Leif pointed out, as he showed the report to Frost. My operations people are really doing a great job." Later that day. Frost looked at the performance report more carefully. She immediately realized that it was improperly prepared and would be misleading to the company's owner. FLAMING FOLIAGE SKY TOURS Performance Report For the Month of September Formula Static Flexible Actual Budget Budget (39,800 air (41, eee air (per air mile) miles) miles) Variance Passenger revenue $ 11.ee $429, eee $451,800 $ 22, e8eu Less: Variable expenses: Fuel $ 1.50 $ 62,300 $ 61,500 $ -800 F Aircraft maintenance 2.20 83,500 90,200 6,700 F Flight crew salaries 1.50 59,109 61,500 2,400 Selling and administrative 2.60 180,400 186,600 6,208 F Total variable expenses $ 7.80 $305,300 $319,800 $14,5ee F Contribution margin $ 3.20 $123,700 $131,200 $ 1,520 V Less: Fixed expenses: Per Month Depreciation on aircraft $10,100 $ 10, 100 $ 10, 10e $ Landing fees 4,100 4,388 4,100 200U Supervisory salaries 38,888 34,500 38,800 3,500F Selling and administrative 47. eee 52,6ee 47,800 5,600 Total fixed expenses $99, 200 $101,500 $ 99, 200 $ 2,300U Operating income $ 22,200 $ 32, eee $ 9,800 Required: 1. Prepare a columnar flexible budget for Flaming Foliage Sky Tours' expenses, using air miles as the cost driver at the following activity levels: 39,000 air miles. 41.000 air miles, and 44.000 air miles. 2. In spite of several favorable expense variances shown on the report above, the company's September operating income was only about two-thirds of the expected level. Identify some of the possible reasons. 4. Prepare a revised expense variance report for September, which is based on the flexible budget prepared in part (1). 3. Jacqueline Frost presented the revised expense report to Leif along with the memo explaining why the original performance report was misleading. Leif did not take it well. He complained of Frost's "interference and pointed out that the company had been doing just fine without her. "I'm taking my report to the owner tomorrow," Leif insisted. "Yours just makes us look bad." What are Frost's ethical obligations in this matter? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 4 Required 5 Prepare a columnar flexible budget for Flaming Foliage Sky Tours' expenses, using air miles as the cost driver at the following activity levels: 39,000 air miles, 41,000 air miles, and 44,000 air miles. Activity Level (Air Miles) 39,000 41,000 44,000 Variable expenses: Total variable expenses $ 0 $ 0 $ 0 Fixed expenses $ 0 $ 0 $ 0 Total fixed expenses Total expenses Required Required 2 > Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 4 Required 5 Prepare a revised expense variance report for September, which is based on the flexible budget prepared in part (1). (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "O" for no effect (i.e., zero variance). Round "per air mile" answers to 2 decimal places.............. Formula Flexible Budget (per air Actual (39,000 Flexible Budget Variance mile) air miles) (39,000 air miles) Variable expenses: Total variable expenses $ 0.00 $ 0 $ 0 Fixed expenses: Per Month $ 0 $ 0 $ 0 Total fixed expenses Total expenses Mark Fletcher, president of SoftGro. Inc., was looking forward to seeing the performance reports for November because he knew the company's sales for the month had exceeded budget by a considerable margin. SoftGro, a distributor of educational software packages, had been growing steadily for approximately two years. Fletcher's biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavorable variance in the company's Monthly Selling Expense Report that follows. SOFTGRO, INC. Monthly Selling Expense Report For the Month of November Annual November November November Budget Budget Actual Variance Unit sales 2,180,00 316,800 348,888 32,800 Dollar sales $152,680, eee $22,120,000 $24, 360, eee $2,240, eee Orders processed 86,400 9,200 8,500 (702) Sales personnel per month 90 90 96 (6) Advertising $ 32,480, eee $ 2,780, eee $ 2,725, eee $ 25,00 Staff salaries 3,248,888 279, 80e 270,000 Sales salaries 3,132,899 261,600 279,800 18, Bee Commissions 6,184,800 884, 800 974,400 89,600 Per diem expense 5,346,800 445, 5ee 477,900 32,488 Office expenses 9,876,800 823, eee 862, eee 39, eee Shipping expenses 14,796,800 2,039,800 2,150, eee 111,800 u Total expenses $ 74,894,800 $ 7,423,300 $ 7,738,300 $ 315,000 Fletcher called in the company's new controller, Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the company's reporting format might not be giving Fletcher a true picture of the company's operations. She proposed that SoftGro implement flexible budgeting. Porter offered to redo the Monthly Selling Expense Report for November using flexible budgeting so that Fletcher could compare the two reports and see the advantages of flexible budgeting. Porter discovered the following information about the behavior of SoftGro's selling expenses. The total compensation paid to the sales force consists of a monthly base salary and a commission: the commission varies with sales dollars. Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of office expense is $6.420.000 annually and is incurred uniformly throughout the year. Subsequent to the adoption of the annual budget for the current year. SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report. Per diem reimbursement to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. SoftGro's original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month The company's shipping expense is a semivariable cost with the variable portion. $6.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoftGro's control over selling expenses. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "O" for no effect (i.e., zero variance). Do not round intermediate calculations.) SOFTGRO, INC. Revised Monthly Selling Expense Report for November Flexible Budget Actual Variance Total expenses HA 0 $ 0
