Problem 9-24 Critiquing a Report; Preparing a Performance Budget [Lo9-1, LO9-2.

Question

Problem 9-24 Critiquing a Report; Preparing a Performance Budget [Lo9-1, LO9-2. LO9-3, Lo9-4 LO9-6] Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges permit particlpants to avoild some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been r analyze performance. The first such report appears below Exchange Corp Analysis of Revenues and Costs For the Month Ended May 31 Planning Budget Actual Unit Unit Revenues Revenues and Costs and Costs Variances Exchanges completed 25 20 $ 540 580 $40U Revenue Expense: Legal and search fees office expenses 11 218 37 Equipment depreciation Rent Insurance 179 170 9 U 6 F 15 F 3 F 30 24 60 12 456 75 15 Total expense Net operating income $ 84 S72 $ 12F Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $218 per exchange completed on the planning budget: whereas, the average actual office expense is $181 per exchange completed. Legal and search fees is a variable cost: office expenses is a mixed cost: and equipment depreciation, rent, and insurance are flxed costs. In the planning budget, the fixed component of office expenses was $4,300. All of the company's revenues come from fees collected when an exchange is completed. Required: 1. Is the report prepared by the bookkeeper useful as a performance report? 2. Complete the performance report that would help the owner/manager assess the performance of the company in May. Complete this question by entering your answers in the tabs below Required 1Required 2 Is the report prepared by the bookkeeper useful as a performance report?

Explanation / Answer

1. NO

2.

*Office expenses:

Planning budget = 20 x $218 = $4360

Variable component = $4360 - $4300 = $60

Variable component per exchange = $60 / 20 = $3

Flexible budget = $4300 + (25 x $3) = $4375

Exchange Corp. Flexible Budget Performance Report For the Month Ended May 31 Actual Results Revenue and Spending Variances Flexible Budget Activity Variances Planning Budget Exchanges completed 25 25 20 Revenues 13500 1000 U 14500 2900 F 11600 Expenses: Legal and search fees 4475 225 U 4250 850 U 3400 Office expenses 4525 150 U 4375 15 U 4360 Equipment depreciation 600 0 None 600 0 None 600 Rent 1500 0 None 1500 0 None 1500 Insurance 300 0 None 300 0 None 300 Total expense 11400 375 U 11025 865 U 10160 Net operating income 2100 1375 U 3475 2035 F 1440

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