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 Assembly Department Cost Report For the Month Ended March 31 Actual Plannin Results Budget 15,000 20,000 Variances Machine-hours Variable costs: Supplies Scrap Indirect materials Fixed costs: Wages and salaries Equipment depreciation Total cost $ 9,900 ? 10,500 600 F 2,500 F 101,000 120,000 19,000 F 35,000 37,500 79,900 75, 000 105,000 105, 000 4,900 U $330,800 $348,000 $17,200 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 Requirec 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?

Explanation / Answer

1) cost reports are ineffective since budgeted costs at one level of activity are compared to acutal costs at another level of activity. cost reports show whether fixed costs are controlled and do not show whether variable costs are controlled 2) flexible budget performance report should be used 3)                                   Flexible Budget Performance Report             Actual Spending variance Flexible Activity variance Planning results Budget Budget Machine hours 15,000 0 15,000 20,000 supplies 9,900 2,025 U 7875 2,625 F 10,500 Scrap 35,000 6,875 U 28125 9,375 F 37,500 indirect materials 101,000 11,000 U 90000 30,000 F 120,000 Wages and salaries 79,900 4,900 F 75,000 0 N 75,000 Equipment Depreciation 105,000 0 U 105,000 0 N 105,000 total 330,800 24,800 U 306000 42,000 F 348,000 (here wages & salaires and Equipment depreciation are fixed costs) Flexible budget = planning budget cost/20000*15000 4) costs were not well controlled

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