Question

AC services provide Air Conditioner maintenance throughout Selangor. The company bases its

overhead cost budgets on the following data:

Budget Price and Expenses
Price of Services RM150 per Service
Variable overhead costs:
Cleaning 30 per Service
Maintenance 10 per Service
Outdoor Expense 20 per Service
Fixed overhead costs:
Salaries and wages 10,000 per month
Depreciation 3,000 per month
Utilities 1,000 per month
Premise Rent 5,000 per month

In January, the following actual costs were incurred for 260 services provided:
Cleaning 5,500
Maintenance 2,580
Outdoor Expenses 2,210
Salaries and wages 11,800
Depreciation 3,500
Utilities 650
Rent 5,000

Due to an unanticipated surge in demand for services in the month of January, the company purchased some equipment to provide faster services. Competition in the market has forced AC Services to reduce the price charged to customers to RM120 for each service.

a. Prepare the Net Operating Income for the Budget and the Actual services.
(10 Marks)

b. Prepare a variance analysis report for AC Services for the month of January.
(10 Marks)

c. To improve situation, AC Services is considering relocating the business and pay less rent to RM3,000. This however will increase the actual outdoor expenses to RM23 per service. Evaluate whether this plan is feasible and suggest some other alternatives to sustain the business.

Answer 1

a. Net Operating Income for the Budget and the Actual services

Step-by-step explanation:

Budgeted revenue for 260 services = RM150 x 260 = RM39,000

Variable overhead costs = (Cleaning + Maintenance + Outdoor Expense) x Number of services

= (RM30 + RM10 + RM20) x 260 = RM15,600

Fixed overhead costs = Salaries and wages + Depreciation + Utilities + Premise Rent

= RM10,000 + RM3,000 + RM1,000 + RM5,000 = RM19,000

Net operating income for the budgeted services = Budgeted revenue - Variable overhead costs - Fixed overhead costs

= RM39,000 - RM15,600 - RM19,000 = RM4,400

Actual revenue for 260 services = RM120 x 260 = RM31,200

Variable overhead costs for actual services = Cleaning + Maintenance + Outdoor Expense

= RM5,500 + RM2,580 + RM2,210 = RM10,290

Fixed overhead costs for actual services = Salaries and wages + Depreciation + Utilities + Rent

= RM11,800 + RM3,500 + RM650 + RM5,000 = RM21,950

Net operating income for the actual services = Actual revenue - Variable overhead costs - Fixed overhead costs

= RM31,200 - RM10,290 - RM21,950 = RM(40)

Therefore, AC Services incurred a net loss of RM40 for the actual services provided in January.

b. Variance analysis report for AC Services for the month of January

Revenue variance = Actual revenue - Budgeted revenue

= RM31,200 - RM39,000 = RM(7,800) (unfavorable)

Variable overhead cost variance = Actual variable overhead cost - Budgeted variable overhead cost

= RM10,290 - RM15,600 = RM(5,310) (favorable)

Fixed overhead cost variance = Actual fixed overhead cost - Budgeted fixed overhead cost

= RM21,950 - RM19,000 = RM2,950 (unfavorable)

Total overhead cost variance = Variable overhead cost variance + Fixed overhead cost variance

= RM(5,310) + RM2,950 = RM(2,360) (favorable)

Net income variance = Actual net operating income - Budgeted net operating income

= RM(40) - RM4,400 = RM(4,360) (unfavorable)

c. To evaluate the feasibility of relocating the business and paying less rent, we need to calculate the new net operating income based on the given information:

Variable overhead costs = (Cleaning + Maintenance + Outdoor Expense) x Number of services

= (RM30 + RM10 + RM23) x 260 = RM17,580

Fixed overhead costs = Salaries and wages + Depreciation + Utilities + Premise Rent

= RM10,000 + RM3,000 + RM1,000 + RM3,000 = RM17,000

Net operating income for the actual services = Actual revenue - Variable overhead costs - Fixed overhead costs

= RM31,200 - RM17,580 - RM17,000 = RM(2,380)

Therefore, relocating the business and paying less rent is not a feasible solution as it would lead to a net loss of RM2,380. Some other alternatives to sustain the business could be increasing the price of services, increasing the number of services provided, or reducing the variable overhead costs by finding more efficient ways to clean and maintain air conditioners.