Performance Report with More Than One Cost Driver [LO4, LO5]
The Munchkin Theater is a nonprofit organization devoted to staging plays for children. The theater has a very small full-time professional administrative staff. Through a special arrangement with the actors’ union, actors and directors rehearse without pay and are paid only for actual performances.
The costs from the current year’s planning budget appear below. The Munchkin Theater had tentatively planned to put on five different productions with a total of 60 performances. For example, one of the productions was Peter Rabbit, which had five performances.
Some of the costs vary with the number of productions, some with the number of performances, and some are fixed and depend on neither the number of productions nor the number of performances. The costs of scenery, costumes, props, and publicity vary with the number of productions. It doesn’t make any difference how many times Peter Rabbit is performed, the cost of the scenery is the same. Likewise, the cost of publicizing a play with posters and radio commercials is the same whether there are 10, 20, or 30 performances of the play. On the other hand, the wages of the actors, directors, stagehands, ticket booth personnel, and ushers vary with the number of performances. The greater the number of performances, the higher the wage costs will be. Similarly, the costs of renting the hall and printing the programs will vary with the number of performances. Administrative expenses are more difficult to pin down, but the best estimate is that approximately 75% of the budgeted costs are fixed, 15% depend on the number of productions staged, and the remaining 10% depend on the number of performances.
After the beginning of the year, the board of directors of the theater authorized changing the theater’s program to four productions and a total of 64 performances. Actual costs were higher than the costs from the planning budget. (Grants from donors and ticket sales were also correspondingly higher, but are not shown here.) Data concerning the actual costs appear below:
Required:
· 1. Prepare a flexible budget for The Munchkin Theater based on the actual activity of the year.
· 2. Prepare a flexible budget performance report for the year that shows both activity variances and spending variances.
· 3. If you were on the board of directors of the theater, would you be pleased with how well costs were controlled during the year? Why or why not?
· 4. The cost formulas provide figures for the average cost per production and average cost per performance. How accurate do you think these figures would be for predicting the cost of a new production or of an additional performance of a particular production?