University Inn's most recent monthly expense analysis report revealed significant cost overruns. The manager was asked to explain the deviations. Below is the "budget v. actual" expense report for the month in question.
University Inn
Budget v. Actual Expense Report
For the Month Ending October 31, 20X7
Actual Budget Variance
Utilities $52,000 $45,000 $(7,000)
Laundry 20,000 18,000 (2,000)
Food service 41,000 35,000 (6,000)
Rent/taxes 60,000 60,000 -
Staff wages 57,000 55,000 (2,000)
Management salaries 43,500 45,000 1,500
Water 13,000 10,000 (3,000)
Maintenance 15,200 15,000 (200)
$301,700 $283,000 $(18,700)
The Inn has observed that utilities, water, food service, staff wages, and laundry costs all vary with activity. The other costs are fixed. The preceding budget was based upon an assumed 80% occupancy rate. The university's football team was on a winning streak and numerous alumni were returning to campus in October, resulting in a 96% occupancy rate during the month.
Required:
Prepare a "flexible budget" based upon a 96% occupancy rate, and identify whether the Inn is being efficiently or inefficiently run. Comment on specific costs, and note why a flexible budget can improve performance evaluations.

University Inn: Flexible Budget:

See attached.

From the flexible budget based upon a 96% occupancy rate, the Inn is being efficiently run.

The costs of Utilities, Laundry, Food Service, and Staff Wages, which were mainly variable costs did not overshoot the flexible budget.  Their performances were favorable as less were spent than budget.

The fixed costs were not expected to change much, especially the Rent/Taxes and Management Salaries.  Maintenance may not be totally fixed.  It is more like a semi-fixed cost in its cost behavior.

A flexible budget can improve performance evaluations in many ways.  One, it responds to changes in the activity levels.  With increased activity, the actual performances if they had been budgeted for would not have showed adverse variances.  It varies according to the entity's needs and can be a better basis for comparing actual performance.  It also provides many possible levels of activity instead of a single one.  Thus, it recognizes that there is nothing steady in real life.  Projections can change with the changing environment and this should be planned for.

Explanation:

A flexible budget changes or flexes with the level of activity or volume.  It is not changeless like a static budget.  A flexible budget is driven by changing cost behaviors.  Costs can be fixed, semi-fixed, and variable.