Prepare flexible budgets for the company based on the following activity levels:
| Particular | Per unit | 32,000 | 35,000 | 38,000 | |
| Passage revenue | $3.50 | 112,000 | 122,500 | 133,000 | |
| Less variable cost | |||||
| Fuel | 0.5 | 16,000 | 17,500 | 19,000 | |
| Aircraft Maintenance | 0.75 | 24,000 | 26,250 | 28,500 | |
| Flight Crew Salaries | 0.4 | 12,800 | 14,000 | 15,200 | |
| Selling and Administration | 0.8 | 25,600 | 28,000 | 30,400 | |
| Total variable cost | 2.45 | 78400 | 85750 | 93100 | |
| Contribution margin | $1.05 | 33,600 | 36,750 | 39,900 | |
| Fixed cost | |||||
| Depreciation of Aircraft | 2,900 | 2,900 | 2,900 | 2,900 | |
| Landing Fees | 900 | 900 | 900 | 900 | |
| Supervisory Fees | 9,000 | 9,000 | 9,000 | 9,000 | |
| Selling and administration | 11,000 | 11,000 | 11,000 | 11,000 | |
| Total Fixed Cost | $23,800 | $23,800 | $23,800 | $23,800 | |
| Profit | 9,800 | 12,950 | 16,100 |
- Prepare a revised performance report showing the proper variances for April, based on the flexible budget that you prepared above.
| Particular | Per unit | Budgeted | Actual | Actual | |
| Passage revenue | $3.50 | $ 112,000 | $ 112,000 | 0 | |
| Less variable cost | |||||
| Fuel | $0.5 | $ 16,000 | $17,000 | 1,000 F | |
| Aircraft Maintenance | $0.75 | $ 24,000 | $ 23,500 | 500 U | |
| Flight Crew Salaries | $ 0.4 | $ 12,800 | $13,100 | 300 F | |
| Selling and Administration | $ 0.8 | $ 25,600 | $24,900 | 700 U | |
| Total variable cost | $ 2.45 | $ 78400 | $78500 | 100 F | |
| Contribution margin | $1.05 | $33,600 | $33,500 | 100 U | |
| Fixed cost | |||||
| Depreciation of Aircraft | $ 2,900 | $ 2,900 | $ 2,900 | 0 | |
| Landing Fees | $ 900 | $ 900 | $ 1,000 | 100 F | |
| Supervisory Fees | $ 9,000 | $ 9,000 | $ 8,600 | 400 U | |
| Selling and administration | $ 11,000 | $ 11,000 | $ 12,400 | 1,400 F | |
| Total Fixed Cost | $ 23,800 | $ 23,800 | $ 24,900 | 1,100 F | |
| $ 9,800 | $ 8,600 | 1,200 U |
Part I
The net profit of the company in the month of April was two-thirds of the expected level, despite several favorable variable expense variances as demonstrated in the performance report. The variance between the budgeted profit and actual profits is a result of different factors. First, the company hand budgeted 35 000 air-km but the actual is 32 000 air-km. flex budget variances calculate using static budget may give inaccurate information. Overestimation of the company sale volume causes the variance between the budgeted profit and actual profit of the company. The actual budget in this case is 32,000 Kilometer. The huge difference between the actual and budgeted profit is a result of the difference in the quantity of activity done. During the preparation of the budget, it seems the management was more ambitious but at the end of business activity, the company failed to achieve the set objectives.
- Explain why the original performance/variance report prepared by the manager of Aircraft Operations is misleading
Variance refers to the difference between the actual figures and the budgeted figures in the flexible budget variance analysis. The difference between the flexible budget and the static planning budget is contributed by the activity variance. The variance between spending and revenue also contribute to the difference between the actual and flexible budget.
A favorable performance is represented by positive variance while unfavorable variance is shown by the negative variance. The main limitation of a static budget is prepared for one level of output and if it cannot be compared directly compared to the actual output. The comparison should be done with the same actual and budgeted financial information. in the above question, the budget is prepared for 32,000 kilometers while the actual financial information is for 32,000KM. It is general knowledge that the sale revenue for 32,000 units will be less compared to the sale revenue of 35,000 units and hence the variance report prepared by the manager of Aircraft Operations is misleading. To compare the actual data the budgeted information of 32,000 units should be revised to 32,000 units.
Further, the performance report is not properly prepared. The performance report should always follow the contribution approach format. A large unfavorable variance is observed in the passenger revenue and hence an indication that the variance may be misleading. It is also good to note that favorable expenses variances do not have an effect on the company operating income. Further unfavorable variance in fixed expenses indicates that the variances are misleading as the fixed income is supposed to remain constant and are not affected by changes by sale revenue. The reduction of budget sales from 35,000 units to 32,00 units should not affect the fixed expenses.
Part III
The nature of work performed by a management accountant is important for any CPA to demonstrate a high level of ethics. Potential and current shareholders, investors, regulatory agencies, lenders, and other users of financial statements for the company depend on financial statements to make an informed decision about the company. Accountants should exercise sound judgment in all their activities. The accountant is assigned the unique responsibility of providing their clients with professional services while proving accurate and reliable assessment of the organization’s financial performance to the general public.
Miranda Jenkins has have made the right decision. After noticing the error on the Fantastic Sky Tours Pty Ltd she prepared his report. She did not only prepare the report but she provided the correct analysis for the company performance in that month. Robert Smith, however, insisted that she could present the original and misleading report to the owner of the company. Based on Robert Smith the decision by Miranda Jenkins was not write as this exposed him to the authority. In case Robert Smith succeeds with his intention to present the misleading report to the company directors, Miranda Jenkins as an ethical obligation to inform the company directors about the misleading financial analysis. Miranda Jenkins should present her memo as well as a revised variance report to Robert Smith. The action of Miranda Jenkins is in line with the ethical code of managerial accountants. The ethical standards dictate that management accountant should observe the following codes;
Integrity
Integrity plays an important role in the accounting profession. As an accountant, you are required to be honest with the financial information of the company. A management accountant should restrict himself from personal advantage or gain using the confidential information of the company. The account has the obligation of avoiding the intentional opportunity to manipulate and deceive financial information in case of variance or difference in accounting information. Integrity dictates that a professional accountant should communicate both favorable and unfavorable information when giving his professional opinion and judgment.
Independent and objectivity
A management accountant is also required to be independent and objective when executing his or her responsibilities. Independence and objectivity are essential ethical responsibilities in the accounting profession. An accountant is supposed to avoid conflict of interest or other questionable business activities when conducting his or her responsibilities. Failure to remain independent and objective may compromise the management accountant’s ability to offer an honest opinion in relation to the entity’s financial information. Independence and objectivity are regarded to be essential ethical values of a professional accountant. Therefore the accountant should ensure all his decisions are guided by independence and objectivity The accountant should, therefore, communicate information objectively and fairly. Further, he should disclose all relevant financial information that could influence the decision making of the intended user of the report.
Duty of due care
The other ethical requirement is the duty of due care. The accountant is required to observe the ethical accounting standard when performing their responsibilities. A professional accountant will require often review the accepted accounting principles (GAAP) as well as the application of the framework in accessing the company’s financial information. Due care dictates the accountants to exercise diligence, competence as well as clearly understand the company’s financial information. The competence of the accountant is based on education and experience. Hence, due diligence may require the management accountant to supervise the work of junior accountants.
Confidentiality
Further, the management accountant should observe confidentiality in his role in the business. It is the responsibility of the management accountant to observe the confidentiality of the company information except when disclosing the authorized and legally require accounting information. The confidential information should only be shared with the relevant parties.
Competence
As an accountant it a professional requirement to prepare a clear and complete report and also offer recommendations. The recommendation given by the accountant should be based on appropriate analysis of reliable and relevant financial information.