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		15,000		20,000
Variable costs:
Supplies	$	9,900	$	10,500	$	600	F
Scrap		35,000		37,500		2,500	F
Indirect materials		101,000		120,000		19,000	F
Fixed costs:
Wages and salaries		79,900		75,000		4,900	U
Equipment depreciation		105,000		105,000		–
Total cost	$	330,800	$	348,000	$	17,200	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		15,000	0		15,000			20,000
	supplies		9,900	2,025	U	7875	2,625	F	10,500
	Scrap		35,000	6,875	U	28125	9,375	F	37,500
	indirect materials		101,000	11,000	U	90000	30,000	F	120,000
	Wages and salaries		79,900	4,900	U	75,000	0	N	75,000
	Equipment Depreciation		105,000	0	U	105,000	0	N	105,000
	total		330,800	24,800	U	306000	42,000	F	348,000
	(here wages & salaires and Equipment depreciation are fixed costs)
	Flexible budget = planning budget cost/20000*15000
4)	costs were not well controlled