Question

Mark Fletcher, president of SoftGro, Inc., was looking forward to seeing the performance reports for November because he knew the company’s sales for the month had exceeded budget by a considerable margin. SoftGro, a distributor of educational software packages, had been growing steadily for approximately two years. Fletcher’s biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavorable variance in the company’s Monthly Selling Expense Report that follows.

SoftGro, Inc.
Monthly Selling Expense Report
For the Month of November
	Annual Budget				November Budget				November Actual				November Variance
Unit sales		2,070,000				294,000				326,000				32,000
Dollar sales	$	128,340,000			$	18,228,000			$	20,212,000			$	1,984,000
Orders processed		60,000				7,000				6,360				(640	)
Sales personnel per month		90				90				96				(6	)
Advertising	$	33,600,000			$	2,800,000			$	2,821,000			$	21,000	U
Staff salaries		2,880,000				240,000				240,000
Sales salaries		1,944,000				162,000				174,400				12,400	U
Commissions		5,133,600				729,120				808,480				79,360	U
Per diem expense		3,564,000				297,000				323,100				26,100	U
Office expenses		7,320,000				670,000				633,200				36,800	F
Shipping expenses		9,864,000				1,308,000				1,413,000				105,000	U
Total expenses	$	64,305,600			$	6,206,120			$	6,413,180			$	207,060	U

Fletcher called in the company’s new controller, Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the company’s reporting format might not be giving Fletcher a true picture of the company’s operations. She proposed that SoftGro implement flexible budgeting. Porter offered to redo the Monthly Selling Expense Report for November using flexible budgeting so that Fletcher could compare the two reports and see the advantages of flexible budgeting.

Porter discovered the following information about the behavior of SoftGro’s selling expenses.

• The total compensation paid to the sales force consists of a monthly base salary and a commission; the commission varies with sales dollars.
• Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of office expense is $5,520,000 annually and is incurred uniformly throughout the year.
• Subsequent to the adoption of the annual budget for the current year, SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report.
• Per diem reimbursement to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. SoftGro’s original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month.
• The company’s shipping expense is a semivariable cost with the variable portion, $4.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year.

Required:

1. Why would Susan Porter propose that SoftGro use flexible budgeting in this situation?
2. Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoftGro’s control over selling expenses

Answer 1

1)
Flexible budgets would allow Mark Fletcher to directly compare SoftGro’s actual selling expenses with the budgeted selling expenses. In general, flexible budgets:
It is useful for both planning purposes and control purposes and is generally used to estimate factory costs and operating costs.
It  is much more realistic than fixed budgets since it gives emphasis on cost behavior at different levels of activity.
2)
Softgro, Inc.
Revised Monthly Selling Expense Report
November
Budgeted unit sales	294,000
Budgeted dollar sales	18,228,000
Budgeted orders processed	7,000
Budgeted salespersons	90
	Actual	Flexible Budget	Variance
Unit sales	326,000	326,000	0
Dollar sales	20,212,000	20,212,000	0
Orders processed	6,360	6,360	0
Sales personnel per month	96	96	0
Advertising	2,821,000	2,800,000	21,000	U
Staff salaries	240,000	240,000	0
Sales salaries ($1,944,000 ÷12 ÷90 salespersons = $1,800 per salesperson x 96	174,400	172800	1,600	U
Commissions (5,133,600/128,340,000 x 20212000	808,480	808480	0
Per diem expense ($3,564000 ÷12 ÷90 salespersons) ÷15 days per salesperson = $220 per day × 15 days per salesperson) × 96 salespersons	323,100	316800	6,300	U
Office expenses ( 7,320,000 - $5,520,000 ÷ 60000 orders = $30 per order; ($5,520,000 ÷12) + ($30 per order× 6360 orders) =	633,200	650800	17,600	F
Shipping expenses (9,864,000 - ($4 per unit × 2,070,000 units)] ÷12 =$132,000 monthly fixed expense $132,000 + ($4 per unit ×326,000 units) =	1,413,000	1436000	23,000	F
Total expenses	6,413,180	6,424,880	11,700	F