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    Exchange Corp: Evaluate a Performance Report

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    Let's look at P10-25 in chapter 10, page 445, (Critiquing a Report; Preparing a Performance Budget) of the e-book and discuss the first question.

    Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, known as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner / manager analyze performance. The first such report appears below:

    Exchange Corp
    Analysis of Revenues and Costs
    For the month ended May 31

    Planning Budget Actual Unit
    Unit Revenues Revenues & Costs Variances
    And Costs
    Exchanges completed 40 50
    Revenue $395 $385 $10 U
    Legal and Search fees 165 184 19 U
    Offfice expenses 135 112 23 F
    Equipment depreciation 10 8 2 F
    Rent 45 36 9 F
    Insurance 5 4 1 F
    Total Expense 360 344 16 F
    Net operating income $35 $41 $6 F

    Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $135 per exchange completed on the planning budget; whereas, the average actual office expense is $112 per exchange completed. Legal and search fees in a variable cost; office expenses is a mixed cost; and equipment depreciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $5,200. All of the company's revenues come from fees collected when an exchange is completed.

    1. Evaluate the report prepared by the bookkeeper.
    2. Prepare a performance report that would help the owner/manager assess the performance of the company in May.
    3. Using the report you created, evaluate the performance of the company in May.

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    Solution Preview

    See attached Excel file.

    1. Evaluate the report prepared by the bookkeeper.

    This report is not helpful because it expresses fixed costs as "per unit" costs. You get the impression that there is a variance when there is no variance. For example, The cost per unit for Depreciation goes from $10 per unit to $8 per unit but in fact, it is $400 a month, regardless of how many we have sold. Look at Rent. It is $1,800 per month regardless of how many exchanges are completed. But when the number of completed exchanges changes, the per unit cost changes (but not the total). Per unit analysis ...

    Solution Summary

    Your tutorial creates a new flexible budget variance report that shows where May's activity was off from expectations. A three-paragraph discussion explains the interpretation of the new report. The report is in Excel (click in cells to see computations).