Question 4 Flexible budget and variance analyses (20 marks) Part A [Flexible budget] Goldman Smith Sky Tours is a small sightseeing tour company in Auckland, specialising in aerial tours in Auckland area. With the growth of the business, Goldman, the owner, recognised the need to upgrade his simple book keeping measures to more formal accounting procedures. He hired Adam Frost as the new accountant for this reason. During his first week on the job, Adam Frost was given the performance report below. The report was prepared by Sham Scott, the company's manager of Aircraft Operations, who was planning to present it to the owner next morning. 'Look at these favourable variances for fuel and so forth, Sham pointed out as he showed the report to Adam. 'My operations people are really doing a great job.' Later that day, Adam looked at the performance report more carefully. He immediately realised that it was improperly prepared and would mislead the company owner. The report was as follows: Goldman Smith Sky Tours Performance Report September Cost and revenue Actual Formulas (per (16 000 air-km) air-km) $3.50 $56 000 Static budget (17,500 air-km) Variance Passenger revenue $61,250 $5,250 u Less Variable expenses: Fuel 0.50 8,500 8,750 250 F Aircraft maintenance 0.75 11,750 13,125 1375 F Flight crew salaries 0.40 6, 550 7,000 450 F Selling and administration 0.80 12,450 14 000 1550 F $2.45 $ 39,250 $ 42,875 $3625 F Total variable expenses Contribution margin $1.05 $ 16,750 $ 18,375 $ 1625 U Less total fixed expenses $11,900 $ 12,450 $ 11.900 $ 550 U Net profit $ 4,300 $ 6,475 $ 2,175 U Question 4.1 Write a brief memo to the owner explaining why the original variance report prepared by Sham Scott is misleading. Also, discuss why net profit was only about two-thirds of the expected level in spite of several favourable expense variances shown in the report. [Word limit: 150 words. Show the word count at the end of your answer] (4 marks) Your Answer (expand the space as required): C ttt Word counte Question 4 2 Question 4.2 Prepare a flexible budget performance report for Goldman Smith Sky Tours, and show the Spending and Revenue variances. (9 marks) Your Answer (add extra rows/columns to the template if required): Goldman Smith Sky Tours! Flexible Budget Performance Report For the month September, XXXX t t t t t t e 4 t t 2 Show your workings here (expand the space as required): ttttt Question 4 Flexible budget and variance analyses (20 marks) Part A [Flexible budget] Goldman Smith Sky Tours is a small sightseeing tour company in Auckland, specialising in aerial tours in Auckland area. With the growth of the business, Goldman, the owner, recognised the need to upgrade his simple book keeping measures to more formal accounting procedures. He hired Adam Frost as the new accountant for this reason. During his first week on the job, Adam Frost was given the performance report below. The report was prepared by Sham Scott, the company's manager of Aircraft Operations, who was planning to present it to the owner next morning. 'Look at these favourable variances for fuel and so forth, Sham pointed out as he showed the report to Adam. 'My operations people are really doing a great job.' Later that day, Adam looked at the performance report more carefully. He immediately realised that it was improperly prepared and would mislead the company owner. The report was as follows: Goldman Smith Sky Tours Performance Report September Cost and revenue Actual Formulas (per (16 000 air-km) air-km) $3.50 $56 000 Static budget (17,500 air-km) Variance Passenger revenue $61,250 $5,250 u Less Variable expenses: Fuel 0.50 8,500 8,750 250 F Aircraft maintenance 0.75 11,750 13,125 1375 F Flight crew salaries 0.40 6, 550 7,000 450 F Selling and administration 0.80 12,450 14 000 1550 F $2.45 $ 39,250 $ 42,875 $3625 F Total variable expenses Contribution margin $1.05 $ 16,750 $ 18,375 $ 1625 U Less total fixed expenses $11,900 $ 12,450 $ 11.900 $ 550 U Net profit $ 4,300 $ 6,475 $ 2,175 U Question 4.1 Write a brief memo to the owner explaining why the original variance report prepared by Sham Scott is misleading. Also, discuss why net profit was only about two-thirds of the expected level in spite of several favourable expense variances shown in the report. [Word limit: 150 words. Show the word count at the end of your answer] (4 marks) Your Answer (expand the space as required): C ttt Word counte Question 4 2 Question 4.2 Prepare a flexible budget performance report for Goldman Smith Sky Tours, and show the Spending and Revenue variances. (9 marks) Your Answer (add extra rows/columns to the template if required): Goldman Smith Sky Tours! Flexible Budget Performance Report For the month September, XXXX t t t t t t e 4 t t 2 Show your workings here (expand the space as required): ttttt