Problem 9-25 Critiquing a Variance Report; Preparing a Performance Report [LO9-1

Question

Problem 9-25 Critiquing a Variance Report; Preparing a Performance Report [LO9-1, LO9-2, LO9-3, LO9-4, LO9-6]

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:

8,700

U

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?

Assembly Department
Cost Report
For the Month Ended March 31 Actual Results Planning Budget Variances Machine-hours 25,000 30,000 Variable costs: Supplies $ 8,100 $

8,700

$ 600 F Scrap 26,600 28,500 1,900 F Indirect materials 79,400 93,000 13,600 F Fixed costs: Wages and salaries 72,700 69,000 3,700

U

Equipment depreciation 99,000 99,000 – Total cost $ 285,800 $ 298,200 $ 12,400 F

Explanation / Answer

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.

4. 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.

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 8700 1450 Favorable 7250 850 Unfavorable 8100 Scrap 28500 4750 Favorable 23750 2850 Unfavorable 26600 Indirect materials 93000 15500 Favorable 77500 1900 Unfavorable 79400 Total variable cost 130200 21700 Favorable 108500 5600 Unfavorable 114100 Fixed costs: Wages and salaries 69000 0 None 69000 3700 Unfavorable 72700 Equipment depreciation 99000 0 None 99000 0 None 99000 Total fixed cost 168000 0 None 168000 3700 Unfavorable 171700 Total cost 298200 21700 Favorable 276500 9300 Unfavorable 285800

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