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	$	6,600	$	7,200	$	600	F
Scrap		19,600		21,000		1,400	F
Indirect materials		61,400		70,500		9,100	F
Fixed costs:
Wages and salaries		66,700		64,000		2,700	U
Equipment depreciation		94,000		94,000		–
Total cost	$	248,300	$	256,700	$	8,400	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. The two reasons the company's president is uneasy about the cost reports are:

i. The cost report does not take into consideration the actual level of activity while comparing the actual costs with the budgeted costs.

ii. The cost variance does not indicate the amount of spending or controllable variance so as to ascertain whether the department has been able to control its costs effectively.

2. Flexible budget performance reports should be used which will compare the budgeted and actual costs at the same level of activity thereby providing a better insight into the ability of departmental supervisors in controlling costs.

3.

Assembly Department
Flexible Budget Performance Report
For the Month Ended March 31
	Planning Budget	Activity Variances		Flexible Budget	Spending Variances		Actual Results
Machine hours	30000			25000			25000
Variable costs:
Supplies	7200	1200	Favorable	6000	600	Unfavorable	6600
Scrap	21000	3500	Favorable	17500	2100	Unfavorable	19600
Indirect materials	70500	11750	Favorable	58750	2650	Unfavorable	61400
Total variable cost	98700	16450	Favorable	82250	5350	Unfavorable	87600
Fixed costs:
Wages and salaries	64000	0	None	64000	2700	Unfavorable	66700
Equipment depreciation	94000	0	None	94000	0	None	94000
Total fixed cost	158000	0	None	158000	2700	Unfavorable	160700
Total cost	256700	16450	Favorable	240250	8050	Unfavorable	248300

4. No. Based on the flexible budget it is seen that there was an unfavorable spending variance thus showing that costs were not controlled well in March.