TACC607 Fantastic Sky Tours Pty Ltd. Budget Analysis Assignment Sample

• Internal Code :
• Subject Code : TACC607
• University :
• Subject Name : Accounting & Finance

Managerial Accounting

Table of Contents

Introduction.

Part I.

Question 1:

Question 2.

Part II.

Flexible budget

Revised performance report

Part III.

Conclusion.

Introduction to Managerial Accounting

In this paper, we talk about a company named "Fantastic Sky Tours Pty Ltd." Fantastic Sky Tours is a small sightseeing company based in New South Wales. The company specializes in conducting tours, which are mostly and only aerial tours in that region specifically. The company has been doing relatively well until recently, being a small company. This company, up until very recent times, did not have a proper accounting department. Considering the size of the company, it was alright as the discussed company plans to scale up and expand its business and operation. It plans to introduce other likely services and open up in other regions. The promoter of the owner of the company has realized a need to set up a formal accounting department that will handle all of the accounting works. Before this, a person felt the company's account like routine bookkeeping tasks that did not have a formal background and education in accounting. The company now plans to expand more precise and complex accounting standards and practices that need to be followed for which the company needs to hire an accountant. Ms. Miranda Jenkins, a CPA, was officially appointed for the post of management accountant and had the complete authority to hire assistants who would work under her supervision (ANAO and Department of Finance, 2004).

In the first week of her job, she scrutinized and analyzed the company's performance and read the performance report. This report was prepared by Robert Smith, who is the Aircraft's Operation manager and not by Ms. Miranda. Mr. Robert had planned to present this report to the owner of the company. But Ms. Miranda had realized that there were several flaws in the performance report, which had to be rectified, and she believed that the figures were misleading. On the contrary, Mr. Robert did not agree with this and thought that he did a good job.

Part I of this paper talks about the Net profit of April as to why this figure is reported the way it is despite having several favorable variances shown. Next, it talks about why the performance report's difference is misleading the version prepared by the Aircraft operations manager.

Part II of this talks about and present the newly stated flexible Budget based on three activity level. Then a revised performance report is given to the management and the audience.

The concluding part of this paper talks about the role of Ms. Miranda and her ethical obligations as a CPA in this company and her profession.

Managerial Accounting - Part 1

Question 1: First, the previous person who prepared this performance report i.e., Mr. Robert, took into consideration only a static budget, including 35,000 air-Kms, whereas the Actual travel was only 32,000 air Kms, a variance, and underestimation of 3000 air km. He should have taken a possible range of input and not just one single input. Let us assume he could have made a range of around 30,000 air km, 32,000 air km, 35,000 air km. Any estimates should always be as flexible as possible, which helps prepare and plan for any worst-case scenario and not be overconfident and overestimate by deciding upon only a single input to analyze.

The Static budgeted passenger revenue was $122,500 vs. actual passenger revenue of $112,000, a variance of $10,500. This is an overestimate of revenue. Estimates should be as conservative as possible. The static budgeted fuel was $17,500 vs $17,000 actual fuel cost. A variance of $500, the estimated aircraft maintenance, was $26,250 vs. $23,500 actual aircraft maintenance. A variance of $2750. An overly estimated contribution margin of $36,750 vs $33,500 actual contribution margin. A huge overestimated margin and variance of $7,250.

When we analyze fixed cost, depreciation was $2900 both actual and estimated, a marginal variance of $100 in landing fees, $400 variation in supervisory salary. The estimated net profit was $12,950 vs. $8,600 actual net profit, a variance of $4,350. The real net profit is 66.41% or two-thirds of the expected profit. The reason is there was a considerable variance in passenger revenue and also massive variance in contribution margin. The predicted revenue and contribution were way higher than the actual income and margins (Covaleski, Dirsmith and Samuel,2017).

Question 2: The original performance and variance report, which was earlier prepared, overly estimated the revenue and contribution margins. The variance in actual vs. estimated revenue, contribution margin, net profit was large, whereas most of the cost item was in line with the actual figures. This led to the overestimation of all revenue and profit figures and nearly close estimation of cost figures. The Static budgeted passenger revenue was $122,500 vs. actual passenger revenue of $112,000, a variance of $10,500. An overly estimated contribution margin of $36,750 vs $33,500 actual contribution margin. A huge overestimated margin and variance of $7,250. The estimated net profit was $12,950 vs. $8,600 actual net profit, a variance of $4,350. The large variation in actual vs. expected revenue also led to a large estimation of net profit. It was misleading as it could have sent wrong signals to the management of the company that the company estimates, and futures look very bright and prosperous and. In contrast, reality shows us a drastic difference. Any Analyst should be as conservative as possible and prepare and plan for the worst-case scenario (Poister, 2010).

Managerial Accounting - Part 2

1. Flexible Budget

• 32000 air – kilometers

	Flexible Budget (per air - km)	Actual (32000 air - km)	Flexible Budget (32000 air - km)
Passenger revenue	3.5	112000	112000
Variable costs:
(-) Fuel	0.5	17000	16000
(-) Aircraft maintenance	0.75	23500	24000
(-) Flight crew salaries	0.4	13100	12800
(-) Selling and administration	0.8	24900	25600
Total variable expenses	2.45	78500	78400
Contribution margin	1.05	33500	33600
Fixed costs:
(-) Depreciation on aircraft	2900	2900	2900
(-) Landing fees	900	1000	900
(-) Supervisory salaries	9000	8600	9000
(-) Selling and administrative	11000	12400	11000
Total fixed expenses	23800	24900	23800
Net profit		8600	9800

Table 1 – Flexible Budget when 32000 air-kilometer

• 35000 air – kilometers

	Flexible Budget (per air - km)	Actual (32000 air - km)	Flexible Budget (35000 air - km)
Passenger revenue	3.5	112000	122500
Variable costs:
(-) Fuel	0.5	17000	17500
(-) Aircraft maintenance	0.75	23500	26250
(-) Flight crew salaries	0.4	13100	14000
(-) Selling and administration	0.8	24900	28000
Total variable expenses	2.45	78500	85750
Contribution margin	1.05	33500	36750
Fixed costs:
(-) Depreciation on aircraft	2900	2900	2900
(-) Landing fees	900	1000	900
(-) Supervisory salaries	9000	8600	9000
(-) Selling and administrative	11000	12400	11000
Total fixed expenses	23800	24900	23800
Net profit		8600	12950

Table 2 – Flexible Budget when 35000 air-kilometer

• 38000 air – kilometers

	Flexible Budget (per air - km)	Actual (32000 air - km)	Flexible Budget (38000 air - km)
Passenger revenue	3.5	112000	133000
Variable costs:
(-) Fuel	0.5	17000	19000
(-) Aircraft maintenance	0.75	23500	28500
(-) Flight crew salaries	0.4	13100	15200
(-) Selling and administration	0.8	24900	30400
Total variable expenses	2.45	78500	93100
Contribution margin	1.05	33500	39900
Fixed costs:
(-) Depreciation on aircraft	2900	2900	2900
(-) Landing fees	900	1000	900
(-) Supervisory salaries	9000	8600	9000
(-) Selling and administrative	11000	12400	11000
Total fixed expenses	23800	24900	23800
Net profit		8600	16100

Table 3 – Flexible Budget when 38000 air-kilometer

2. Revised Performance Report

• 32000 air – kilometers

	Flexible Budget (per air - km)	Actual (32000 air - km)	Flexible Budget (32000 air - km)	Variances
Passenger revenue	3.5	112000	112000	0
Variable costs:
(-) Fuel	0.5	17000	16000	1000
(-) Aircraft maintenance	0.75	23500	24000	-500
(-) Flight crew salaries	0.4	13100	12800	300
(-) Selling and administration	0.8	24900	25600	-700
Total variable expenses	2.45	78500	78400	100
Contribution margin	1.05	33500	33600	-100
Fixed costs:
(-) Depreciation on aircraft	2900	2900	2900	0
(-) Landing fees	900	1000	900	100
(-) Supervisory salaries	9000	8600	9000	-400
(-) Selling and administrative	11000	12400	11000	1400
Total fixed expenses	23800	24900	23800	1100
Net profit		8600	9800	-1100

Table 4 – Revised performance when 32000 air-kilometer

• 35000 air – kilometers

	Flexible Budget (per air - km)	Actual (32000 air - km)	Flexible Budget (35000 air - km)	Variances
Passenger revenue	3.5	112000	122500	-10500
Variable costs:
(-) Fuel	0.5	17000	17500	-500
(-) Aircraft maintenance	0.75	23500	26250	-2750
(-) Flight crew salaries	0.4	13100	14000	-900
(-) Selling and administration	0.8	24900	28000	-3100
Total variable expenses	2.45	78500	85750	-7250
Contribution margin	1.05	33500	36750	-3250
Fixed costs:
(-) Depreciation on aircraft	2900	2900	2900	0
(-) Landing fees	900	1000	900	100
(-) Supervisory salaries	9000	8600	9000	-400
(-) Selling and administrative	11000	12400	11000	1400
Total fixed expenses	23800	24900	23800	1100
Net profit		8600	12950	-4350

Table 5 – Revised performance when 35000 air-kilometer

• 38000 air – kilometers

	Flexible Budget (per air - km)	Actual (32000 air - km)	Flexible Budget (38000 air - km)	Variances
Passenger revenue	3.5	112000	133000	-21000
Variable costs:
(-) Fuel	0.5	17000	19000	-2000
(-) Aircraft maintenance	0.75	23500	28500	-5000
(-) Flight crew salaries	0.4	13100	15200	-2100
(-) Selling and administration	0.8	24900	30400	-5500
Total variable expenses	2.45	78500	93100	-14600
Contribution margin	1.05	33500	39900	-6400
Fixed costs:
(-) Depreciation on aircraft	2900	2900	2900	0
(-) Landing fees	900	1000	900	100
(-) Supervisory salaries	9000	8600	9000	-400
(-) Selling and administrative	11000	12400	11000	1400
Total fixed expenses	23800	24900	23800	1100
Net profit		8600	16100	-7500

Table 6 – Flexible Budget when 38000 air-kilometer

Managerial Accounting - Part 3

Ms. Miranda, as a profession CPA, has a fiduciary duty towards her employer and the CPA profession to act in the best interest of all. We can see and comment that Ms. Miranda did a great job of upholding the dignity of her business.

The ethical obligation as a CPA in this manner is as follows:

• Responsibilities: As a professional CPA, Ms. Miranda has significant responsibility for the service she provides. In this case, she did a remarkable job of pointing out "what is wrong and understated." She has abided by to be responsible to her employer i.e., Mr. David Lowry
• Public Interest: Every action that any CPA takes should be towards serving the public interest. Ms. Miranda has served and worked towards the public interest by not hiding the facts and figures and pointing out "What is fair and honest" to report and not manipulate or overstate performance.
• Integrity: By actually not letting the prior performance report, which was wrongly stated to be presented to the owner, has upheld the integrity of herself and the CPA profession (Goddard and Mkasiwa, 2016).
• Objectivity and independence: By not falling prey to any bonuses or compensation wrongly structured or presenting wrong facts under the pressure of the influence of any group Ms. Miranda has shown independence in her judgment and her profession.
• Due Care: Miranda, a CPA, was and is expected and obligated to practice accounting standards and provide professional services to the best her interest and ability. This is only achieved through continuous learning and upskilling, performing annual performance evaluation, adequate supervision, etc. Due care is needed to take when dealing with the public, investors, clients, stakeholders. It also helps prevent any unlawful doings that may otherwise occur. Due and reasonable care should be taken in all aspects of accounting, auditing, and other services (Walter and Uhr, 2013).

Conclusion on Managerial Accounting

We conclude by saying that Ms. Miranda, a CPA has upheld the integrity of herself and her profession. Her ethical obligation towards her employer was not compromised at all. Mr. Robert, who tried to present the improperly prepared performance report to the management, was not led to do so by Ms. Miranda. Ms. Miranda re-stated and prepared a flexible budget for the company based on a range of activity levels 32,000 air Kms, 35,000 air-Kms, 38,000 air km. She then made a revised performance report showing the proper variance for April based on the flexible budget. Preparing a flexible budget rather than a static budget helps a company plan well in advance for any unforeseen events or worst-case scenario. A flexible budget considers different ranges of inputs. It estimates different varieties of output rather than a static budget, which only takes into account one input and estimates only one output.

This does not help a company in contingency planning and planning for the future. Any rational management accountant would consider many different scenarios and then present it to the management. We also conclude by saying that preparing the statements of accounts, income statements, balance sheets, different types of budgets should only be done by an expert who is a qualified accountant like a CPA. It is also not advisable for a company as it grows not to have a proper accounting and finance department in place. If an amateur prepares accounting reports at any point in time, those reports tend to be misleading, and it can bring a bad name to the company in due course of time. This needs to be avoided under all circumstances wherever possible (Downes, Ronnie, Delphine and Scherie, 2017).

References for Managerial Accounting

ANAO and Department of Finance and Administration (2004), Better Practice in Annual Performance Reporting, Canberra.

Covaleski, M.A., Dirsmith, M.W. and Samuel, S. (2017), “Social constructionist research in accounting”, in Hoque, Z. (Ed.), The Routledge Companion to Qualitative Accounting Research Methods, Routledge, London and New York, NY, pp. 17-35.

Church, B.K., Kuang, X.J. and Liu, Y.S. (2019), “The effects of measurement basis and slack benefits on honesty in budget reporting”, and Accounting, Organizations Society, Vol. 72, January, pp. 74-84.

Goddard, A. and Mkasiwa, T.A. (2016), “New public management and budgeting practices in

Tanzanian Central Government: ‘struggling for conformance’ ”, Journal of Accounting in

Emerging Economies, Vol. 6 No. 4, pp. 340-371.

Downes, Ronnie, Delphine Moretti, and Scherie Nicol. (2017). Budgeting and performance in the European Union:A review by the OECD in the context of EU budget focused on results. OECD Journal on Budgeting 17: 1–60.

 Poister, Theodore H. 2010. The Future of Strategic Planning in the Public Sector: Linking Strategic Management and Performance. Public Administration Review 70: S246–S54

Walter, R., and J. Uhr. (2013). ‘Budget talk: Rhetorical constraints and contests’. Australian Journal of Political Science, 48(4): 431-444

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