Required information PR 11-45 (Algo) Preparing and Using a Columnar Flexible Budget; Tour Company; Ethical Issues (LO 11-1, 11-2, 11-6) 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 Budget (per air mile) $ 11.00 $ 1.50 2.20 1.50 Actual (39,000 air miles) $ 429,000 Static Budget (41,000 air miles) $ 451,000 $ 61,500 90,200 61,500 106,600 2.60 $ 62,300 83,500 59,100 100,400 $ 7.80 $ 305,300 $ 319,800 $ 3.20 $ 123,700 $ 131,200 Per Month $ 10,100 Passenger revenue Less: Variable expenses: Fuel Aircraft maintenance Flight crew salaries Selling and administrative Total variable expenses Contribution margin Less: Fixed expenses: Depreciation on aircraft Landing fees Supervisory salaries Selling and administrative Total fixed expenses Operating income $ 10,100 4,100 38,000 47,000 $ 99,200 4,300 $ 10,100 4,100 38,000 47,000 34,500 52,600 $ 101,500 $ 22,200 $ 32,000 $ 99,200 Variance U $ 22,000 $ -800 F 6,700 F 2,400 F 6,200 $ 14,500 F F $ 7,500 U $ 0 200 3,500 D G U F 5,600 U $ 2,300 $ 9,800 U U PR 11-45 (Algo) Part 1: Prepare a columnar flexible budget 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). 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? 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. Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses Total expenses Activity Level (Air Miles) 39,000 41,000 44,000 EA EA 0 $ 0 $ 0 0 $ 0 $ 0 Prepare a revised expense variance report for September, which is based on the flexible budget prepared in part (1). Note: 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 (39,000 air miles) Flexible Budget Variance (39,000 air miles) Variable expenses: $ 1.50 $ 62,300 2.20 83,500 1.50 59,100 2.60 100,400 Total variable expenses $ 7.80 $ 305,300 Fixed expenses: Per Month $ 10,100 $ 10,100 4,100 4,300 38,000 34,500 47,000 52,600 Total fixed expenses Total expenses 99,200 $ 101,500 $ 0 $ 406,800