Question

A report for Easterly Corporation's production department for the month of May follows: Production Department Cost Report For the Month Ended May 31 Actual Results Planning Budget Variances Machine-hours 25,000 30,000 Variable costs: Supplies $ 5,700 $ 6,300 $ 600 F Scrap 15,400 16,500 1,100 F Indirect materials 50,600 57,000 6,400 F Fixed costs: Wages and salaries 63,100 61,000 2,100 U Equipment depreciation 91,000 91,000 – Total cost $ 225,800 $ 231,800 $ 6,000 F After receiving a copy of this cost report, the supervisor of the Production 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 month of May, based on Flexible Budget Performance approach. 4. Were costs well controlled in May?

Answer 1

Solution 1:

Solution 1:

The company president is uneasy about the cost report because:

a. Cost reports are ineffective since budgeted cost at one level of activity are compared to actual cost at another level of activity.

b. Cost report show whether fixed cost are controlled and do not show whether variable cost are controlled.

Solution 2:

Flexible budget performance report must be used to give better insight how well department supervisor controlling costs.

Solution 3:

Easterly Corporation
Production Department
Flexible Budget Performance Report
For the month ended May 31
Particulars	Actual results	Flexible Budget Variance		Flexible Budget	Activity Variance		Static Budget
Machine hours	25000			25000			30000
Supplies	$5,700.00	$450.00	U	$5,250.00	$1,050.00	F	$6,300.00
Scrap	$15,400.00	$1,650.00	U	$13,750.00	$2,750.00	F	$16,500.00
Indirect materials	$50,600.00	$3,100.00	U	$47,500.00	$9,500.00	F	$57,000.00
Wages and Salaries	$63,100.00	$2,100.00	U	$61,000.00	$0.00	None	$61,000.00
Equipment Depreciation	$91,000.00	$0.00	None	$91,000.00	$0.00	None	$91,000.00
Total	$225,800.00	$7,300.00	U	$218,500.00	$13,300.00	F	$231,800.00

Solution 4:

As flexible budget variance is unfavorable, therefore costs were not well controlled in assembly department.