The Exterminator Inc. provides on-site residential pest extermination services.

Question

The Exterminator Inc. provides on-site residential pest extermination services. The company has several mobile teams who are dispatched from a central location in company-owned trucks. The company uses the number of jobs to measure activity. At the beginning of May, the company budgeted for 200 jobs, but the actual number of jobs turned out to be 208. A report comparing th budgeted revenues and costs to the actual revenues and costs appear below:

The Exterminator inc

Variance Report for the month ended May 31

Planning budget Actual Results Variances

Jobs 200 208

Revenue $3,700 $36,400 $600 U

Expenses:

Mobile team oper costs 16,900 17,060 160 U

Exterminating supplies 4,000 4,350 350 U

Advertising 900 1040 140 U

Dispatching costs 2,700 2,340 360 U

Office Rent 2,300 2,300 0

Insurance 3,600 3,600 0

Total Expense 30,400 30,690 290 U

Net Oper Income $6,600 $5,710 $890 U

Is the above variance report useful for evaluating how well revenues and costs were controlled during May? why or why not?

Explanation / Answer

The variance report of Exterminator Inc. for May should not be used. The planning budget of 200 jobs is prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity, which is 208 jobs, differs from the planned level of activity. Comparing static planning budgets with actual costs is like comparing apples and oranges. A flexible budget may be prepared for any activity level in the relevant range. Flexible budgets show costs that should have been incurred at the actual level of activity, enabling "apples to apples" cost comparisons. Flexible budgets help managers control costs. Flexible budgets improve performance evaluation. Static Planning Budget has deficiencies. Certain questions cannot be answered using a static budget. Such as since the variance of Mobile team operating costs is unfavorable, has Exterminator Inc. done a poor job controlling costs? On Dispatching costs, since the variance is Favorable, did Exterminator Inc. done a good job controlling costs? I don't think one can answer the questions using a static budget. Actual activity is above planned activity. So, the variable costs should be higher if actual activity is higher. The relevant question is, "How much of the cost variances are due to higher activity and how much are due to cost control?" To answer this question, we must flex the budget to the actual level of activity. To flex a budget, we need to know that total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range.


Reference: Chapter 9 Powerpoint slides

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