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:

Assembly Department Cost Report For the Month Ended March 31
	Actual Results		Planning Budget		Variances
Machine-hours		25,000		30,000
Variable costs:
Supplies	$	7,200	$	7,800	$	600	F
Scrap		22,400		24,000		1,600	F
Indirect materials		68,600		79,500		10,900	F
Fixed costs:
Wages and salaries		69,100		66,000		3,100	U
Equipment depreciation		96,000		96,000		–
Total cost	$	263,300	$	273,300	$	10,000	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

Westmont corporation
Answer 1- Cost reports are ineffective since budgeted costs at one level of activity are compared to
actual costs at another level of activity .
Cost reports show whether FC are controlled and do not show whether VC are controlled.
Point 1 and Point 2 are the required answer.
Answer 2-
Flexible Budget performance reports must be used.
Answer 3-
Flexible Budget Performance Reoprt
	Actual Results ( 25000 Machine hours )	spending Variances		Flexible budget (25000 machine hours)	Calculation for flexible budget	Activity varaince		Planning Budget (30000 machine hours )
Expenses :
Supplies	7,200	700	U	6500	7800 * 25000 /30000	-1300	F	7800
Scraps	22,400	2,400	U	20000	24000 * 25000 / 30000	-4000	F	24000
Indirect material	68,600	2,350	U	66250	79500 * 25 / 30	-13250	F	79500
W and S	69,100	3,100	U	66000		0		66000
Depreciation	96,000	0	U	96000		0		96000
Total expense	2,63,300	8,550	U	2,54,750		-18,550	F	2,73,300
Answer 4-
Costs were not well controlled as there is negative spending variance of $ 8550.