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 typical departmental cost report for a recent period follows:

Assembly Department Cost Report For the Month Ended March 31
	Actual Results		Planning Budget		Variances
Machine-hours		50,000		55,000
Variable costs:
Supplies	$	48,950	$	52,250	$	3,300	F
Scrap		32,400		33,000		600	F
Indirect materials		82,800		88,000		5,200	F
Fixed costs:
Wages and salaries		89,250		90,000		750	F
Equipment depreciation		70,000		70,000		–
Total cost	$	323,400	$	333,250	$	9,850	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, what can be the reason? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

	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 fixed costs are controlled and do not show whether variable costs are controlled.
	Cost reports are effective since budgeted costs at one level of activity are compared to actual costs at another level of activity.
	Cost reports show whether fixed costs and variable costs are controlled.

2. What kind of reports should be used to give better insight into how well departmental supervisors are controlling costs?

	Flexible budget performance reports must be used
	Fixed budget performance reports must be used

3. Complete the new performance report for the quarter, based on Flexible Budget Performance approach. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

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 actual costs at another level of activity.

2. Flexible budget performance reports must be used.

3. Flexible budget performance report

Assembly Department Flexible Budget Performance Report For the Month Ended March 31
	Actual Results		Flexible Budget		Variances
Machine-hours		50,000		50,000
Variable costs:
Supplies	$	48,950	$	47,500	$	1,450	U
Scrap		32,400		30,000		2,400	U
Indirect materials		82,800		80,000		2,800	U
Fixed costs:
Wages and salaries		89,250		90,000		750	F
Equipment depreciation		70,000		70,000		–
Total cost	$	323,400	$	317,500	$	5,900	U

  

Calculation of Flexible budgets for Variable costs

1. Supplies:

Budgeted Cost of supplies at the activity of 55,000 Machine hours = $52,250

Budgeted cost of supplies at the activity of 50,000 Machine hours

= $52,250 x [50,000 ÷ 55,000] = $47,500

2. Scrap:

Budgeted Cost ofScrap at the activity of 55,000 Machine hours = $33,000

Budgeted cost of Scrap at the activity of 50,000 Machine hours

= $33,000 x [50,000 ÷ 55,000]

= $30,000

3. Indirect Materials:

Budgeted Cost of Indirect Materials at the activity of 55,000 Machine hours = $88,000

Budgeted cost of Indirect Materials at the activity of 50,000 Machine hours

= $88,000 x [50,000 ÷ 55,000]

= $80,000

Fixed costs: Fixed costs remain same irrespective of the level of activity.

4. Costs are not in control as the Total cost has the Unfavorable variance.