Question

Puget Sound Divers is a company that provides diving services such as underwater ship repairs to clients in the Puget Sound area. The company's planning budget for May appears below:
Puget Sound Divers
Planning Budget
For the Month Ended May 31
Budgeted diving-hours (q) 100
Revenue ($365.00q) $36,500
Expenses:
Wages and salaries ($8,000 + $125.00q) 20,500
Supplies ($3.00q) 300
Equipment rental ($1,800 + $32.00q) 5,000
Insurance ($3,400) 3,400
Miscellaneous ($630 + $1.80q) 810
Total expense 30,010
Net operating income $6,490

During May, the company's activity was actually 105 diving-hours. Make a flexible budget using the same format as the planning budget for that level of activity.

Answer 1

Answer:

With the actual activity the net income is Net income=   $7506

Explanation:

A flexible budget is a budget that adjusts to changes in volume or activity. The flexible budget is more sophisticated and useful than a static budget. The budget will include a variable rate per unit of activity instead of one fixed total amount.

A flexible  budget has the following advantages:

- Usage in variable cost environment. The flexible budget is especially useful in businesses where costs are closely aligned with the level of business activity.

- Performance measurement. Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating the performance of managers.

- Budgeting efficiency. Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized.

In this exercise:

q=105 diving hours

Revenue                                $38325 ($365x105q)

Variable costs:

Wages and salaries               $13125   ($125.00x105)

Supplies                                 $315         ($3.00x105)

Equipment rental                   $3360       ($32.00x105)

Miscellaneous                        $189          ($1.80x105)

Total Variable costos=           $16989

Contribution margin=             $21336        (38325-16989)

Fixed Costs:

Wages and salaries             $8,000

Equipment rental                 $1,800

Insurance                             $3,400

Miscellaneous                     $630

Total fixed costs=               $13830

Net income=                      $7506           (21336-13830)