Reference no: EM133025181

Question - Say we mow lawns and we prepare a planning budget based on mowing 500 lawns. In our planning budget we estimate that our cost for gasoline will be $1,200. At the end of the month we determine that we actually mowed 525 lawns and our actual gasoline cost is $1,425.

Our actual cost ($1,425) is greater than our budgeted cost ($1,200) so we would say that we have an unfavorable variance (our cost was higher than budgeted). However, gasoline in this case would be considered a variable cost. So wouldn't we EXPECT the gasoline cost to be higher because we mowed more lawns? Of course we would. So how do we figure out if our cost is higher just because we mowed more lawns or is it higher because of poor cost control?

We will prepare a flexible budget to accomplish this. A flexible budget is a budget we prepare at the actual level of activity. Then we will be able to compare a budget at the actual level of activity to actual results at that same level of activity.

Answer the following questions: A restaurant has a cost with the following cost formula: $1,000 + $5q ; where q = number of meals served.

The restaurant's planning budget is based on 1,000 meals. Its actual level of activity was 900 meals and the actual amount of the cost at 900 meals was $5,575.

1) What is the amount of the cost on the planning budget?

2) What is the amount of the cost on the flexible budget?

3) What is the spending variance for this cost?