Question

Problem 6: Budgeting

Dog-Gone Haven is reviewing their budget for the current year. Currently, they are using a static budget to determine performance. The kennels have a capacity for 80 kennels, but Dog-Gone Haven budgeted to only use 60 kennels every day for the current year. They budgeted to have a price increase and charge customers $25/day. Dog-Gone Haven was able to bring in additional boarders, so that 65 boarding dogs stayed at the facility every day. The following is the information used to for the budget process.

                                                                               Actual               Budget

              Variable Expenses

         Feed & supplies                                   105,000                90,000                       

         Veterinary fees                                       58,000                55,000                       

         Training fees                                             6,000                  5,500

               

               Fixed Expenses

         Depreciation & insurance                                                 55,000             55,000

         Utilities                                                   10,000                12,000                       

         Repairs & maintenance                         11,000                12,000                       

         Labor                                                     85,000                93,000                       

a) Create the static budget

b) Create the flexible budget

c) How does your evaluation of the operating performance change after preparing the flexible

    budget?

Answer 1

a & b)	The static budget and flexible budget and the variance anlysis is calculated in tabular form below:
		Static Budget	Activity Variance		Flexible Budget	Expenditure Variance		Actuals
	Number of Boarding dogs/day	60			65			65
	Variable expenses:
	Feed and supplies	$           90,000	$              7,500	U	$                97,500	$                  7,500	U	$     1,05,000
	Veterinary fees	$           55,000	$              4,583	U	$                59,583	$                  1,583	F	$         58,000
	Training fees	$             5,500	$                 458	U	$                   5,958	$                        42	U	$           6,000
	Total variable expenses	$       1,50,500	$           12,542	U	$             1,63,042	$                  5,958	U	$     1,69,000
	Fixed expenses:
	Depreciation and insurance	$           55,000	$                     -		$                55,000	$                         -	N	$         55,000
	Utilities	$           12,000	$                     -		$                12,000	$                  2,000	F	$         10,000
	Repairs and maintenance	$           12,000	$                     -		$                12,000	$                  1,000	F	$         11,000
	Labor	$           93,000	$                     -		$                93,000	$                  8,000	F	$         85,000
	Total fixed expenses	$       1,72,000	$                     -		$             1,72,000	$               11,000	F	$     1,61,000
	Total expenses	$       3,22,500	$           12,542	U	$             3,35,042	$                  5,042	F	$     3,30,000
c)	The activity variances are beyond the control of the management. They are not reponsible for the variances as the reason is
	in the level of activity.
	The management is responsible only for the expenditure variances. The expenditure variance is favorable for all fixed costs.
	In the case of variable expenses, the variance is high in the case of 'Feed and supplies' and should be investigated.
	Overall, the management has been able to reduce the expenses by $5042 and they need to be commended for that.