Explain why the original performance/variance report prepared by the manager of Aircraft Operations is misleading

Question:

Read carefully the following Case information before planning to write the Report

Fantastic Sky Tours Pty Ltd is a small sightseeing tour company in Sydney that specialises in aerial tours of the New South Wales area. Until recently, the company had not had an accounting department. Routine bookkeeping tasks, such as billing, had been handled by a person who had little formal training in accounting. As the business began to grow, however, the owner recognised the need for more formal accounting procedures. Miranda Jenkins, a CPA, was recently hired as the new management accountant, and she has the authority to hire an assistant.

During her first week on the job, Miranda was given the performance report on the next page. The report was prepared by Robert Smith, the company’s manager of Aircraft Operations, who was planning to present it to the owner, David Lowry, the next morning.

‘Look at these favourable variances for fuel and so forth,’ Robert pointed out as he showed the report to Miranda. ‘My operations people are really doing a great job.’

Later that day, Miranda looked at the performance report more carefully. She immediately realised that it was improperly prepared and would be misleading to the company’s owner.

Performance Report prepared by the manager of Aircraft Operations

Fantastic Sky Tours Pty Ltd

Performance Report for the month of April 2020

Tasks And Report Requirements

Assuming the role of Miranda Jenkins at Fantastic Sky Tours Pty Ltd, prepare a report to the owner of the company providing explanations and revised reports in relation to the operating performance in April 2020, and address her ethical obligations arising from the response from the manager of Aircraft Operations. Your report should contain the following three parts:

Part I

  1. Explain why the company’s April net profit was only about two-thirds of the expected level, despite several favourable variable expense variances shown in the above performance report.
  2. Explain why the original performance/variance report prepared by the manager of Aircraft Operations is misleading.

Part II

  1. Prepare flexible budgets for the company based on the following activity levels:

(a) 32 000 air-kilometres.

(b) 35 000 air-kilometres.

(c) 38 000 air-kilometres.

  1. Prepare a revised performance report showing the proper variances for April, based on the flexible budget that you prepared above.

Part III

Miranda Jenkins presented her revised performance report to Robert Smith, along with the explanation why the original performance report was misleading. Robert did not take it well. He complained of Miranda’s ‘interference’ and pointed out that the company had been doing just fine without her. ‘I am taking my report to the owner tomorrow,’ Robert insisted. ‘Yours just makes us look bad.’

What are Miranda’s ethical obligations as a CPA in this matter? What should she do?

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