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 companys 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 companys owner.

FLAMING FOLIAGE SKY TOURS
Performance Report
For the Month of September
	Formula Flexible Budget (per air mile)					Actual (33,000 air miles)					Static Budget (35,000 air miles)					Variance
Passenger revenue		$	12.50				$	412,500				$	437,500				$	25,000	U
Less: Variable expenses:
Fuel		$	1.80				$	62,400				$	63,000				$	600	F
Aircraft maintenance			2.35					74,750					82,250					7,500	F
Flight crew salaries			1.20					41,000					42,000					1,000	F
Selling and administrative			2.90					94,400					101,500					7,100	F
Total variable expenses		$	8.25				$	272,550				$	288,750				$	16,200	F
Contribution margin		$	4.25				$	139,950				$	148,750				$	8,800	U
Less: Fixed expenses:		Per Month
Depreciation on aircraft		$	10,400				$	10,400				$	10,400				$	0
Landing fees			4,400					4,900					4,400					500	U
Supervisory salaries			41,000					39,300					41,000					1,700	F
Selling and administrative			50,000					55,900					50,000					5,900	U
Total fixed expenses		$	105,800				$	110,500				$	105,800				$	4,700	U
Operating income							$	29,450				$	42,950				$	13,500	U

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: 33,000 air miles, 35,000 air miles, and 38,000 air miles. 2. In spite of several favorable expense variances shown on the report above, the companys 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). 5. 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 Frosts interference and pointed out that the company had been doing just fine without her. Im taking my report to the owner tomorrow, Leif insisted. Yours just makes us look bad. What are Frosts ethical obligations in this matter?