PROBLEM 8-A1_______________________________________________________________

Drake Shipping Companys general manager reports quarterly to the company president on the
firms 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 cant see how this performance report helps me
evaluate cost control performance.

Exhibit 8-10
Drake Shipping
Operating Performance Report
Second Quarter, 20X1

Budget Actual Variance

Net revenue $8,000,000 $7,600,000 $400,000 U
Fuel $ 160,000 $ 157,000 $ 3,000 F
Repairs and maintenance 80,000 78,000 2,000 F
Supplies and miscellaneous 800,000 788,000 12,000 F
Variable payroll 5,360,000 5,200,000 160,000 F
Total variable costs* $6,400,000 $6,223,000 $177,000 F
Supervision $ 180,000 $ 183,000 $ 3,000 U
Rent 160,000 160,000
Depreciation 480,000 480,000
Other fixed costs 160,000 158,000 2,000 F
Total fixed costs $ 980,000 $ 981,000 $ 1,000 U
Total costs charged against revenue $7,380,000 $7,204,000 $176,000 F
Operating income $ 620,000 $ 396,000 $224,000 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.

PROBLEM 8-A1
Continued
Required:

1. Prepare a columnar flexible budget for Drake Shipping at revenue levels of $7,000,000,
$8,000,000 and $9,000,000. 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 master (static) budget variance, the sales activity
variance, and the flexible-budget variance.

Instructions:

1. Review the printed template called Problem 8-A1 that follows these instructions. In some
problems, some of the problem data have been entered for you in the data input section of the
spreadsheet.

Enter the amounts where indicated.

2. There are 32 FORMULAS in the template that you need to provide to complete your
analysis. Using the spaces provided below, write the formulas where requested in the template.

FORMULA 1 _________________ FORMULA 11 _________________

FORMULA 2 _________________ FORMULA 12 _________________

FORMULA 3 _________________ FORMULA 13 _________________

FORMULA 4 _________________ FORMULA 14 _________________

FORMULA 5 _________________ FORMULA 15 _________________

FORMULA 6 _________________ FORMULA 16 _________________

FORMULA 7 _________________ FORMULA 17 _________________

FORMULA 8 _________________ FORMULA 18 _________________

FORMULA 9 _________________ FORMULA 19 _________________

FORMULA 10 _________________ FORMULA 20 _________________

PROBLEM 8-A1
Continued

FORMULA 21 _________________ FORMULA 27 _________________

 FORMULA 22 _________________ FORMULA 28 _________________

FORMULA 23 _________________ FORMULA 29 _________________

FORMULA 24 _________________ FORMULA 30 _________________

FORMULA 25 _________________ FORMULA 31 _________________

FORMULA 26 _________________ FORMULA 32 _________________

3. Click the Excel icon from the program manager screen to start the spreadsheet program. Click
on the Open File SmartIcon/Button to retrieve the template for the problem. Enter the
missing amounts in the appropriate cells on the template. Then enter the 32 FORMULAS
where indicated on the template.

Type the answer where indicated.

4. Click the Save File SmartIcon/Button to save your work.

5. Click the Print Button to print your work.