Question

Several years ago, Westmont Corporation developed a comprehensive budgeting system for planning and control purposes. While departmental supervisors have been happy with the system, the factory manager has expressed considerable dissatisfaction with the information being generated by the system. A report for the company's Assembly Department for the month of March follows: Variances Assembly Department Cost Report For the Month Ended March 31 Actual Planning Results Budget Machine-hours 35,000 40,000 Variable costs: Supplies $ 29,700 $ 32,000 Scrap 19,500 20,000 Indirect materials 51,800 56,000 Fixed costs: Wages and salaries 79,200 80,000 Equipment depreciation 60,000 60,000 Total cost $240,200 $ 248,000 $2,300 F 500 F 4,200 F 800 F $7,800 F After receiving a copy of this cost report, the supervisor of the Assembly Department stated, "These reports are super. It makes me feel really good to see how well things are going in my department. I can't understand why those people upstairs complain so much about the reports." For the last several years, the company's marketing department has chronically failed to meet the sales goals expressed in the company's monthly budgets. Required: 1. The company's president is uneasy about the cost reports, identify at least two reasons. 2. What kind of reports should be used to give better insight into how well departmental supervisors are controlling costs? 3. Complete the new performance report for the quarter, based on Flexible Budget Performance approach. 4. Were costs well controlled in March?

Answer 1

1)	cost reports are ineffective since budgeted costs at one level of
	activity are compared to acutal costs at another level of
	activity.
	cost reports show whether fixed costs are controlled and do not
	show whether variable costs are controlled
2)	flexible budget performance report should be used
3)	Flexible Budget Performance Report
			Actual	Spending variance		Flexible	Activity variance		Planning
			results			Budget			Budget
	Machine hours		35,000	0		35,000			40,000
	supplies		29,700	1,700	U	28000	4,000	F	32,000
	Scrap		19,500	2,000	U	17500	2,500	F	20,000
	indirect materials		51,800	2,800	U	49000	7,000	F	56,000
	Wages and salaries		79,200	800	F	80,000	0	N	80,000
	Equipment Depreciation		60,000	0	U	60,000	0	N	60,000
	total		240,200	5,700	U	234500	13,500	F	248,000
	(here wages & salaires and Equipment depreciation are fixed costs)
	Flexible budget = planning budget cost/40000*35000
4)	costs were not well controlled