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 2,140,000   308,000   332,000   24,000

Dollar sales$162,640,000  $23,408,000  $25,232,000  $1,824,000

Orders processed 76,800   8,400   7,820   (580)

Sales personnel per month 90   90   96   (6)

Advertising$42,000,000  $3,500,000  $3,528,000  $28,000U

Staff salaries 3,240,000   270,000   270,000     

Sales salaries 2,700,000   225,000   240,200   15,200U

Commissions 6,505,600   936,320   1,009,280   72,960U

Per diem expense 4,698,000   391,500   420,400   28,900U

Office expenses 8,637,600   783,800   745,600   38,200F

Shipping expenses 14,508,000   1,987,000   2,094,000   107,000U

Total expenses$82,289,200  $8,093,620  $8,307,480  $213,860U

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 $6,180,000 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, $6.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year.

Required:

Why would Susan Porter propose that SoftGro use flexible budgeting in this situation?

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

Refer the below images for the above asked questions, in a detailed way of solution.

Solution : © Flexible budgets would allow Mark Fletcher to directly compare soltero's actual Selling expenses (based on the current month's actual activity with the budgeted Selling expenses. In general, flexible budgets: - provide management with the tools to evaluate the effects of varying levels of activity on costs, profits and cash position. - enable management to improve planning and deasion making. e improve the is of actual results. Softgro, Inc. Monthly setting expense Revised Report November Budgited Budgeted Budgeted Budgeted whit sates dollar sales orders processed salesperson 308000 $ 23408000 4400 90

particulars Actual Flexible Budget Variance unit Sales Dollar Sales orders processed sales persons 332000 $ 23232000 7320 332000 $25232000 7820 96 96 $2 Booo u Advertising expense Stald Salaries expense Sates salaries expense" commission expense per diem expense 3 office expense 4 Shipping expense Toral. $3528000 $270000 xa чo2 оо $1009280 4420400 $745600 $ 2094000 $8307480 3500bdo 270000 $240000 8 936320 & 417600 4 783800 $ 2131000 $9278720 4200 U $729600 $28000 $ 38200 F $37000 F $28760 U penses workings: 0 Monthly salary for Sales person: & 225000 (budget) – $2500 per sales person. qo Saler person Budgeted amount = $2.500 per sales person x 96 Sales person 240000 0 commission rate : $ 936326 004 4 23408000 Budgeted commission amour - $ 23408000 Budget dollar saly xo.oy - 1936320

$391500 (budget) 15 days per sales person go Sales person = 4290 per day ($ 290 per day & 15 days per sales person) & 96 sales persons = $ 417 600 4 (Annual Budget - Annual fixed portion expense) & orders processed wally = ($ 8637600 - $6180000) = 76800 orders = $ 32 per order :-( 96180000 $12) + (§ 32 per order y 8400 oyders) o = $ 783800 [Annual Budger a(&6 peronier & Annual whit sales] : 12 Is 14508000 - (46 peronit x 2140000)] = $ 139000 monthly fixed expense (6 6 peronit t 332000 budget units) $139000 + 11992000 = $ 21 31000