Financial Accounting

University InnBudget v. Actual Expense ReportFor the Month Ending October 31, 2007

Actual (at 96% capacity)
Budget (established at 80% capacity)
Variance

Utilities
$ 52,000
$ 45,000
$ (7,000)

Laundry
20,000
18,000
(2,000)

Food service
41,000
35,000
(6,000)

Rent/taxes
60,000
60,000

Staff wages
57,000
55,000
(2,000)

Management salaries
43,500
45,000
1,500

Water
13,000
10,000
(3,000)

Maintenance
15,200
15,000
(200)

$ 301,700
$ 283,000
$ (18,700)

The Inn has observed that utilities, water, food service, staff wages, and laundry costs all vary with activity. The other costs are fixed. The budget reflected above was based upon an assumed 80% occupancy rate. The university’s football team was on a winning streak and numerous alumni were returning to campus in October, resulting in a 96% occupancy rate during the month.
Prepare a “flexible budget” based upon a 96% occupancy rate, and identify whether the Inn is being efficiently or inefficiently run. Comment on specific costs, and note why a flexible budget can improve performance evaluations.
An example of the first line of the budget is provided below:

Actual
Budget
Variance

Utilities
$52,000
$54,000
$2,000 under budget

Actual is already at 96% capacity
The budget was 45,000 assuming 80% capacity. To convert to 96% capacity: 45,000 divide by 0.8 = 56,250 (representing 100% capacity) X > 0.96 = 54,000