Question

Flexible Budgets and Performance Evaluation

Presented is the January performance report for the Production Department of Nowwhat Company.

NOWWHAT COMPANY

Production Department Performance Report

For Month of January

Actual Budget Variance

Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 38,000

Manufacturing costs

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000 $152,000 $ 8,000 U

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,000 228,000 67,000 U

Variable overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,000 114,000 48,000 U

Fixed overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000

38,000 2,000 F

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $653,000 $532,000 $121,000 U

Required

a. Evaluate the performance report.

b. Prepare a more appropriate performance repor

Answer 1

a. This performance report is based on the Actual volume of 40,000 units and Budgeted volume of 38,000 units.

As per this report Actual cost is more than budgeted cost by 121,000 USD. But this report is not comparing the actual volume and the budgeted cost for actual volume.

b. More appropriate performance report is as prepared below:

NOWWHAT COMPANY
Production Department Performance Report
For Month of January
	Actual	Flexible Budget	Variance
Volume	40,000	40,000
Manufacturing costs
Direct materials	1,60,000	1,60,000	0	None
Direct labor	2,95,000	2,40,000	55,000	U
Variable overhead	1,62,000	1,20,000	42,000	U
Fixed overhead	36,000	38,000	-2,000	F
Total	6,53,000	5,58,000	95,000	U

Working:

	Flexible Budget
Volume	40,000
Manufacturing costs
Direct materials	152,000/38,000*40,000
Direct labor	228,000/38,000*40,000
Variable overhead	114,000/38,000*40,000
Fixed overhead	38,000