E. Combine activity, revenue and spending variances Revenue/Cost Planning Formulas Budget Flexible Budget (2) 550 From (C) Activity Variances (2) - (1) = (3) From (D) Actual evenue and Spending Results Variances (4) - (2) = (5) Favorab 550 (1) Favorable? (4) Number of lawns (Q) 500 37,500 $ 41,250 $ 43,000 $ Revenue ($75Q) $ Expenses: Wages and salaries ($5,000 + $300) $ Gasoline and supplies ($90) Equipment maintenance ($3Q) Office and shop utilities ($1,000) Office and shop rent ($2,000) Equipment Depreciation ($2,500) Insurance ($1,000) Total expenses Net operating income $ 20,000 $ 4,500 1,500 1,000 2,000 2,500 1,000 32,500 5,000 $ 21,500 4,950 1,650 1,000 2,000 2,500 1,000 34,600 6,650 23,500 5,100 1,300 950 2,000 2,500 1,200 36,550 6,450 $ To know The main difference between (2) and (1): the 50 lawns difference (activity) The main difference between (4) and (2): the cost rate obtained --- whether the manager is able to reduce it and manage the cost rates well Total of ACTIVITY, REVENUE and SPENDING variances: (3) + (5) -- doesn't mean a lot because we don't know whether it is due to activity difference or costri Characteristics of Flexible Budgets 1. May be prepared for any activity level in the relevant range. 2. Show costs that should have been incurred at the actual level of activity, enabling "apples to apples" cost comparison. 3. Help managers control costs. 4. Improve performance evaluation. Deficiencies of the Static Planning Budget We cannot answer this question because the actual level of activity is different from the planned level of activity. Therefore, actual variable costs are likely to be higher than planned variable costs regardless of Larry's managerial efficiency