Author Question: Financial statements are prepared by taking the figures directly from the work sheet. Indicate ... (Read 46 times)

bcretired · **on:** Jul 6, 2018

Financial statements are prepared by taking the figures directly from the work sheet.
Indicate whether the statement is true or false

Question 2

Static and flexible budgets, service sector.

Student Finance (StuFi) is a startup that aims to use the power of social communities to transform the student loan market. It connects participants through a dedicated lending pool, enabling current students to borrow from a school's alumni community. StuFi's revenue model is to take an upfront fee of 40 basis points (0.40) each from the alumni investor and the student borrower for every loan originated on its platform.

StuFi hopes to go public in the near future and is keen to ensure that its financial results are in line with that ambition. StuFi's budgeted and actual results for the third quarter of 2014 are presented below.

Required:
1. Prepare StuFi's static budget of operating income for the third quarter of 2014.
2. Prepare an analysis of variances for the third quarter of 2014 along the lines of Exhibit 7- 2; identify the sales volume and flexible budget variances for operating income.
3. Compute the professional labor price and efficiency variances for the third quarter of 2014.
4. What factors would you consider in evaluating the effectiveness of professional labor in the third quarter of 2014.

laurnthompson · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

T

Answer to Question 2

Static Budget
1. Revenue (8,200 0.8 145,000) 9,512,000
Variable costs:
Professional labor (8 45 8,200) 2,952,000
Credit verification (100 8,200) 820,000
Federal documentation fees (120 8,200) 984,000
Courier services (50 8,200) 410,000
Total variable costs 5,166,000
Contribution margin 4,346,000
Fixed administrative costs 800,000
Fixed technology costs 1,300,000
Operating income 2,246,000

2. Actual results for third quarter 2014:
Revenue (10,250 0.8 162,000) 13,284,000
Variable costs:
Professional labor (9.5 50 10,250) 4,868,750
Credit verification (100 10,250) 1,025,000
Federal documentation fees (125 10,250) 1,281,250 Courier services (54 10,250) 553,500 Total variable costs 7,728,500
Contribution margin 5,555,500
Fixed administrative costs 945,000
Fixed technology costs _ 1,415,000 31,000
Operating income 3,195,500

Level 2 Analysis
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (1) (3) (3) (3) (5) (5)
Loans 10,250 0 10,250 2,050 F 8,200
Revenue 13,284,000 1,394,000 F 11,890,000 2,378,000 9,512,000
Variable costs:
Professional labor 4,868,750 1,178,750 U 3,690,000 738,000 U 2,952,000
Credit verification 1,025,000 0 1,025,000 205,000 U 820,000
Federal doc. Fees 1,281,250 51,250 U 1,230,000 246,000 U 984,000
Courier services 553,500 41,000 U 512,500 102,500 U 410,000
Total variable costs 7,728,500 1,271,000 U 6,457,500 1,291,500 U 5,166,000
Contribution margin 5,555,500 123,000 F 5,432,500 1,086,500 F 4,346,000
Fixed administrative costs 945,000 145,000 U 800,000 0 800,000
Fixed technology costs 1,415,000 115,000 U 1,300,000 0 1,300,000
Operating income 3,195,500 137,000 U 3,332,500 1,086,500 F 2,246,000
137,000 U 1,086,500 F
Total flexible- Total sales-
budget variance volume variance
949,500 F
Total static-budget variance
3.
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
Actual Price) Budgeted Price Budgeted Price)
(1) (2) (3)
(10,250 9.5 50) (10,250 9.5 45) (10,250 8.0 45)
97,37 hrs. 50/hr. 97,375 hrs. 45/hr. 82,000 hrs. 45/hr.
4,868,750 4,381,875 3,690,000
486,875 U 691,875 U
Price variance Efficiency variance
1,178,750 U
Flexible-budget variance

4. Effectiveness refers to the degree to which a predetermined objective is accomplished. One objective of StuFi professional labor is to maximize loan-based revenue (0.8 of loan amount number of loans). The professional staff has increased the number of loans from a budgeted 8,200 to 10,250, a significant increase. In addition, the average loan amount increased from a budgeted 145,000 to 162,000. The result is an increase in revenue from the budgeted 9,512,000 to actual 13,284,000.
With both a higher number of loans and a higher average amount per loan, there was an increase in the effectiveness of professional labor in the third quarter of 2014.