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 Flexible Actual Budget (40,000 air (per air mile) miles) $ 11.50 $ 460,000 Static Budget (43,000 air miles) $ 494,500 Variance $ 34,500 U $ Passenger revenue Less: Variable expenses: Fuel Aircraft maintenance Flight crew salaries Selling and administrative Total variable expenses Contribution margin 1.60 2.25 1.60 2.70 8.15 3.35 $ 67,900 87,500 64,700 106,900 $327,000 $ 133,000 $ 68,800 96,750 68,800 116,100 $ 350, 450 $144,050 $ 900 F 9, 250 F 4,100F 9,200 F $ 23,450 F $11,050 U $ $ Less: Fixed expenses: Depreciation on aircraft Landing fees Supervisory salaries Selling and administrative Total fixed expenses Operating income Per Month $ 10,200 4,200 39,000 48,000 $ 101,400 $ 10,200 4,500 35,000 53,700 $ 103, 400 $ 29,600 $ 10,200 4,200 39,000 48,000 $ 101,400 $ 42,650 $ 0 300 U 4,000 F 5,700 U $ 2,000 U $ 13,050 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: 40,000 air miles, 43,000 air miles, and 46,000 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). 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 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? 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: 40,000 air miles, 43,000 air miles, and 46,000 air miles. Activity Level (Air Miles) 40,000 43,000 46,000 Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses Total expenses Required 2 Required 4 Required 5 Required 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. (Select which of the following statements (is) are true by selecting an "X".) The variance report is misleading because the activity levels used for the comparison differ. There is a large unfavorable variance in passenger revenue. Favorable expense variances have no impact on operating income. There are unfavorable variances in fixed expenses. 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 "0" for no effect (i.e., zero variance). Round "per air mile" answers to 2 decimal places.) Formula Flexible Budget (per air mile) Actual (40,000 Flexible Budget air miles) (40,000 air miles) Variance Variable expenses: Total variable expenses Fixed expenses: Per Month Total fixed expenses Total expenses Required 1 Required 2 Required 4 Required 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 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? (Select which of the following statements (is) are true by selecting an "X".) Show less Frost should let Leif decide on the best course of action. Frost should resign in protest. Frost should show the owner her memo to Leif as well as the revised expense variance report. Frost has an ethical obligation to make the owner aware that she believes Leif's analysis is faulty. Required 2 Required 4 Required 5 Required 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. (Select which of the following statements (is) are true by selecting an "X".) The variance report is misleading because the activity levels used for the comparison differ. There is a large unfavorable variance in passenger revenue. Favorable expense variances have no impact on operating income. There are unfavorable variances in fixed expenses. 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 "0" for no effect (i.e., zero variance). Round "per air mile" answers to 2 decimal places.) Formula Flexible Budget (per air mile) Actual (40,000 Flexible Budget air miles) (40,000 air miles) Variance Variable expenses: Total variable expenses Fixed expenses: Per Month Total fixed expenses Total expenses Required 1 Required 2 Required 4 Required 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 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? (Select which of the following statements (is) are true by selecting an "X".) Show less Frost should let Leif decide on the best course of action. Frost should resign in protest. Frost should show the owner her memo to Leif as well as the revised expense variance report. Frost has an ethical obligation to make the owner aware that she believes Leif's analysis is faulty.