Question

You just got off the phone with your boss, and boy was he mad. The final numbers just came in for the year, and you went over your budget by over 6%. As Director of Operations, you oversee most of the production departments at the Whispering Phone Book. Your budget covers production, distribution, and operations. Your boss wouldn’t listen when you tried to explain that the overage was not all your fault, and in fact, was not all bad. You decide that the only way to convince him was by showing him the numbers, since he is the CFO and all. Since your staff is so busy with year- end closings, you decide to hire a consultant. to prepare all the information you will need for the meeting with your boss on Friday.

Your job is to save the Director’s skin with his boss. Prepare a report, utilizing your knowledge of Managerial Accounting, that provides explanations for what caused the budget overage. Your report MUST include the creation of a flexible budget, the calculation of activity and performance variances, and a memo explaining the analysis to your boss.

Following is pertinent information for your analysis:

·        When you built the budget last August, you made the following assumptions:

o   Whispering phone book would produce 100,000 phone books across the country.

o   Production costs were $1.00 per book

o   Planned distribution costs were .25 per book.

o   Paper prices would amount to 3.50 per book.

o   You estimated 1.50 per book for printing costs.

·        Actual production was 110,000 books

·        You employed 40 production workers.

·        Phone, supplies, administrative costs, and maintenance do not vary with volume.

	2014 Budget	2014 Actual
Particulars
Paper		$375,000
Printing Costs		$162,000
Distribution Costs		$26,200
Production Wages		$108,000
Phone Costs	$1,200	$1,150
Supplies	$2,000	$2,300
Admin Costs	$300,000	$310,000
Maintenance	$10,000	$10,000
Total		$994,650

Answer 1

Note :- Yellow Highlighted fields are Variable Cost. Variable budgeted cost is calculated on the basis of budgeted units 100,000

Analysis :-

1. It is observed that "Total Per Unit Actual Cost of Production" is $ 9.04 which is less than the "Total Per Unit Budgeted Cost of Production" i.e $9.38

2) No of Labour used in both the Jobs is 40. It means that the Labour is efficiently utilized while producing units 110,000.

3) Per Variable Cost is ultimately reduced in case of Actual Production (Units 110,000).

4) We can also observe that the "Total Actual Cost of Production" is increased by 6% as compare to  "Total Budgeted Cost of Production". On the contrary, "Actual Units Produced" is increased by 10% (i.e 10,000) as compare to "Budgeted Units"

Finally, We conclude that the "Actual Production" i.e 110,000 units is a better option and more profitable option for the company.