Question

Mark Fletcher, president of SoftGro, Inc., was looking forward to seeing the performance reports for November because he knew the company’s sales for the month had exceeded budget by a considerable margin. SoftGro, a distributor of educational software packages, had been growing steadily for approximately two years. Fletcher’s biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavorable variance in the company’s Monthly Selling Expense Report that follows.

SOFTGRO, INC.
Monthly Selling Expense Report
For the Month of November
	Annual Budget				November Budget				November Actual				November Variance
Unit sales		2,100,000				300,000				338,000				38,000
Dollar sales	$	176,400,000			$	25,200,000			$	28,392,000			$	3,192,000
Orders processed		67,200				7,600				6,900				(700	)
Sales personnel per month		90				90				96				(6	)
Advertising	$	37,200,000			$	3,100,000			$	3,124,000			$	24,000	U
Staff salaries		3,120,000				260,000				260,000
Sales salaries		2,268,000				189,000				201,700				12,700	U
Commissions		7,056,000				1,008,000				1,135,680				127,680	U
Per diem expense		4,050,000				337,500				364,800				27,300	U
Office expenses		8,299,200				691,600				729,000				37,400	U
Shipping expenses		14,220,000				1,935,000				2,117,000				182,000	U
Total expenses	$	76,213,200			$	7,521,100			$	7,932,180			$	411,080	U

Fletcher called in the company’s new controller, Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the company’s reporting format might not be giving Fletcher a true picture of the company’s operations. She proposed that SoftGro implement flexible budgeting. Porter offered to redo the Monthly Selling Expense Report for November using flexible budgeting so that Fletcher could compare the two reports and see the advantages of flexible budgeting.

Porter discovered the following information about the behavior of SoftGro’s selling expenses.

• The total compensation paid to the sales force consists of a monthly base salary and a commission; the commission varies with sales dollars.
• Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of office expense is $5,880,000 annually and is incurred uniformly throughout the year.
• Subsequent to the adoption of the annual budget for the current year, SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report.
• Per diem reimbursement to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. SoftGro’s original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month.
• The company’s shipping expense is a semivariable cost with the variable portion, $6.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year.

Required:
2. Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoftGro’s control over selling expenses.

Answer 1

2)
Softgro, Inc.
Revised Monthly Selling Expense Report
November
Budgeted unit sales	300000
Budgeted dollar sales	25200000
Budgeted orders processed	7600
Budgeted salespersons	90
	Actual	Flexible Budget	Variance
Unit sales	338000	338000	0
Dollar sales	$        28,392,000	$         28,392,000	0
Orders processed	6900	6900	0
Sales personnel per month	96	96	0
Advertising	$          3,124,000	$           3,100,000	$                        24,000	U
Staff salaries	$             260,000	$              260,000	$                                -	None
Sales salaries ($2268000 ÷12 ÷90 salespersons = $2,100 per salesperson x 96	$             201,700	$              201,600	$                             100	U
Commissions (7056000/176,400,000 x 28392000	$          1,135,680	$           1,135,680	$                                -	None
Per diem expense ($4050000 ÷12 ÷90 salespersons) ÷15 days per salesperson = $250 per day × 15 days per salesperson) × 96 salespersons	$             364,800	$              360,000	$                          4,800	U
Office expenses ( 8,299,200 - $5,880,000 ÷ 67200 orders = $36 per order; ($5880,000 ÷12) + ($36 per order× 6900  orders) =	$             729,000	$              710,800	$                        18,200	U
Shipping expenses (14,220,000 - ($6 per unit × 2,100,000 units)] ÷12 =$135,000 monthly fixed expense $135,000 + ($6 per unit ×338,000 units) =	$          2,117,000	$           2,163,000	$                        46,000	F
Total expenses	$          7,932,180	$           7,931,080	$                          1,100	U