Chapter 10, Problem 10.23P

To determine

Evaluation of the report prepared by bookkeeper.

Introduction: Performance report means report prepared for analyzing the performance of the variances on actual level and budgeted level. These performance reports are prepared on routine basis by different departments of the organization.

Answer to Problem 10.23P

The report prepared is based on actual revenue per unit and budgeted revenue per unit. Increase or decrease in level of activity of the cost must be maintained. So, this report cannot be used as the performance report.

Explanation of Solution

Evaluation of performance report prepared:

1. Considering all cost to be variable.
2. It cannot be assumed that variance of particular cost are fixed or mixed.
3. Report prepared is based on actual revenue per unit and budgeted revenue per unit.
4. Increase or decrease in level of activity of the cost must be maintained. In this case budgeted level of activity is less than actual activity. Whereas, actual costs are less than planned costs.
5. So, this report cannot be used as the performance report.

To determine

Prepare performance report of the company that help manager to analyze the performance of the company.

Introduction: Performance report means report prepared for analyzing the performance of the variances on actual level and budgeted level. These performance reports are prepared on routine basis by different departments of the organization.

Answer to Problem 10.23P

The performance report of the company that helps manager to analyze the performance has unfavorable spending variance of $\$1,600(U)$ and favorable activity variance of $\$2,250\left(F\right)$ .

Explanation of Solution

Prepare flexible budget performance report.

Particulars	Actual results	Spending variances	Flexible budget	Activity variances	Planning budget
Exchanges completed	$\$50$		$\$50$		$\$40$
Total revenue	$\$19,250$	$\$500\left(U\right)$	$\$19,750$	$\$3,950\left(F\right)$	$\$15,800$
Less: Expenses
Legal and search fee	$\$9,200$	$\$950\left(U\right)$	$\$8,250$	$\$1,650\left(U\right)$	$\$6,600$
Office expenses	$\$5,600$	$\$150(U)$	$\$5,450$	$\$50$	$\$5,400$
Equipment   $\left(\$10\times 40\right)$	$\$400$	$\$0$	$\$400$	$\$0$	$\$400$
Rent   $\left(\$45\times 40\right)$	$\$1,800$	$\$0$	$\$1,800$	$\$0$	$\$1,800$
Insurance   $\left(\$5\times 40\right)$	$\$200$	$\$0$	$\$200$	$\$0$	$\$200$
Total expenses	$17,200	$1,100(U)	$16,100	$1,700(U)	$4,400
Net operating income	$\$2,050$	$\$1,600(U)$	$\$3,650$	$\$2,250\left(F\right)$	$\$1,400$

Working Notes:

  $\begin{array}{l}Officeexpenses=\$5,200+\left(\frac{(\$135\times 40)-\$5,200}{40}\right)\\ Officeexpenses=\$5,200+(5\times 50)\\ Officeexpenses=\$5,450\end{array}$

Computation of revenue and cost for flexible budget

Particulars	Fixed cost	+	Amount per exchange	$\times$	Number of exchanges	=	Flexible budgeted value
Total revenue	$0$	+	$395$	$\times$	$50$	=	$19,750$
Legal and search fee	$0$	+	$165$	$\times$	$50$	=	$8,250$
Office expenses	$5,200$	+	$5$	$\times$	$50$	=	$5,450$
Equipment depreciation	$400$	+	$0$	$\times$	$50$	=	$400$
Rent	$1,800$	+	$0$	$\times$	$50$	=	$1,800$
Insurance	$200$	+	$0$	$\times$	$50$	=	$200$

Computation of revenue and cost for planned budget

Particulars	Fixed cost	+	Amount per exchange	$\times$	Number of exchanges	=	Flexible budgeted value
Total revenue	$0$	+	$395$	$\times$	$40$	=	$15,800$
Legal and search fee	$0$	+	$165$	$\times$	$40$	=	$6,600$
Office expenses	$5,200$	+	$5$	$\times$	$40$	=	$5,400$
Equipment depreciation	$400$	+	$0$	$\times$	$40$	=	$400$
Rent	$1,800$	+	$0$	$\times$	$40$	=	$1,800$
Insurance	$200$	+	$0$	$\times$	$40$	=	$200$

To determine

Evaluate the performance of the company by the analyzing the performance report.

Introduction: Performance report means report prepared for analyzing the performance of the variances on actual level and budgeted level. These performance reports are prepared on routine basis by different departments of the organization.

Answer to Problem 10.23P

Unfavorable spending variance and unfavorable revenue variances are the main reason for change in performance report. So, these details should be investigated by owner or manager of the company

Explanation of Solution

The performance of the company by the analyzing the performance report gives following information:

1. Actual results of net operating profit is $\$2,050$
2. Unfavorable spending variance and unfavorable revenue variances are the main reason for change in performance report.
3. As per favorable activity the net operating profit should be increased by $\$2,250$ .
4. These details should be investigated by owner or manager of the company.