8-A1

Burton Transportation Company general manager reports quarterly to the company president on the firm operating performance. The company uses a
budget based on detailed expectations for the forthcoming quarter. The general manager has just received the condensed quarterly performance report shown in
Exhibit 8-10.

Although the general manager was upset about not obtaining enough revenue she was happy that her cost performance was favorable; otherwise
her net operating income would be even worse.

The president was totally unhappy and remarked: I can see some merit in comparing actual performance with budgeted performance because we can
see whether actual revenue coincided with our best guess for budget purposes. But I cannot see how this performance report helps me evaluate cost control
performance.
Exhibit 8-10
BurtonTransportation Operating
Performance Report Second Quarter 20X1

Budget Actual Variance

Net revenue $8000000 $7600000 $400000 U

Variable Costs

Fuel $ 160000 $ 157000 $ 3000 F

Repairs and maintenance 80000 85000 5000 U

Supplies and miscellaneous 800000 788000 12000 F

Variable payroll 5360000 5200000 160000 F

Total variable costs* $6400000 $6230000 $180000
F

Fixed Costs

Supervision $ 180000 $ 183000 $ 3000 U

Rent 160000 160000 0

Depreciation 480000 480000 0

Other fixed costs 160000 158000 2000 F

Total fixed costs $ 980000 $ 981000 $ 1000 U

Total fixed and variable costs $7380000 $7211000 $169000
F

Operating income $ 620000 $ 389000 $231000 U

U = Unfavorable

F = Favorable

*For purposes of this analysis assume that all these costs are totally variable with respect to sales revenue. In practice many are mixed
and have to be subdivided into variable and fixed components before a meaningful analysis can be made. Also assume that the prices and mix of services sold
remain unchanged.

1. Prepare a columnar flexible budget for Burton Transportation at revenue levels of $7200000 $8000000 and $8800000. Assume that the
prices and mix of products sold are equal to the budgeted prices and mix.

2. Express the flexible budget for costs in formula form.

3. Prepare a condensed table showing the static-budget variance the sales-activity variance and the flexible-budget variance.