Puget Sound Divers is a company that provides diving services such as underwater ship repairs to clients in the Puget Sound area. The company's planning budget for May appears below:

Puget Sound Divers

Planning Budget

For the Month Ended May 31

Budgeted diving-hours (q) 100

Revenue ($365.00q) $36,500

Expenses:

Wages and salaries ($8,000 + $125.00q) 20,500

Supplies ($3.00q) 300

Equipment rental ($1,800 + $32.00q) 5,000

Insurance ($3,400) 3,400

Miscellaneous ($630 + $1.80q) 810

Total expense 30,010

Net operating income $6,490

During May, the company's activity was actually 105 diving-hours. Make a flexible budget using the same format as the planning budget for that level of activity.

With the actual activity the net income is Net income = $7506

Explanation:

A flexible budget is a budget that adjusts to changes in volume or activity. The flexible budget is more sophisticated and useful than a static budget. The budget will include a variable rate per unit of activity instead of one fixed total amount.

A flexible budget has the following advantages:

- Usage in variable cost environment. The flexible budget is especially useful in businesses where costs are closely aligned with the level of business activity.

- Performance measurement. Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating the performance of managers.

- Budgeting efficiency. Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized.

In this exercise:

q=105 diving hours

Revenue $38325 ($365x105q)

Variable costs:

Wages and salaries $13125 ($125.00x105)

Supplies $315 ($3.00x105)

Equipment rental $3360 ($32.00x105)

Miscellaneous $189 ($1.80x105)

Total Variable costos = $16989

Contribution margin = $21336 (38325-16989)

Fixed Costs:

Wages and salaries $8,000

Equipment rental $1,800

Insurance $3,400

Miscellaneous $630

Total fixed costs = $13830

Net income = $7506 (21336-13830)