Vision Sky Tours is a sightseeing tour company based in New England. The firm specializes in aerial tours of the New England countryside and coastline. Until recently, the company had no accounting department. Routine tasks, such as billing, were 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 Smith was hired as a new controller. During her first week on the job, Smith was given the following performance report. The report was prepared by Red Sky, 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, Sky noted.My operations people are really doing a great job. Later that day, Smith looked at the performance report more carefully.

1. Based on the information in Red Skys report, prepare a performance report for September using air miles as the cost driver. 2. In spite of several favorable expense variances shown on Red Skys report, the company's September operating income was only about two-thirds of the expected level. Why? 3. Write a brief memo to the manager of aircraft operations explaining why his variance report is misleading.

Pertermaance Roport For t Month of September Formula Flexible Budget Actual (32,000 air miles) $336,000 Static Budget (35,000 air miles) $367,500 (per alr mle) Varlance $10.50 $31 500 U Passengar enue Less: Varlatie expensest Fue Aircraft mantenance. Seling and admnistrative... 1.50 2.25 1.20 2.40 $ 735 $ 3.15 $ 51,000 70,500 39.300 74,700 $235,500 $100,500 $ 52,500 78,750 42,000 84,000 $257,250 $110,250 S 1,500 F 8,250 F 2,700 F 9,300 F $21,750 F 9,750 U Per Month LeSs: Fled expeises S 8,700 3,000 26,800 37,200 74,700 S 25,800 S 8,700 2,700 27,000 33,000 S 71.400 $ 38,850 $ 0 Landng rees Supentsory salanes. Seing and aaministrative.. S 8,700 2,700 27,000 33,000 $71.400 300 U 1,200 F 4,200 U S 3,300 U $13,050U Totsl nxed expanses Operating Income