ezto.mheducation.com Several years ago, Westmont Corporation developed a compreh

ID: 2474781 • Letter: E

Question

ezto.mheducation.com 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 typical departmental cost report for a recent period follows: Assembly Department Cost Report For the Month Ended March 31 Actual Planning ResultsBudget Variances Machine-hours Variable costs: 25,000 30,000 Supplies Scrap Indirect materials $ 7,500 S 8,100 $ 800 F 23,800 25,5001,700 F 72,200 84,000 11,800 F Fixed costs: Wages and salaries Equipment depreciation 70,300 67,000 3,300 U 3,300 u $270,800 $281,600 $ 10,800 F 97,000 97,000 Total cost reports are super. It makes me feel really good to see how well things are going in my department. I cant 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, what can be the reason? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Cost reports are ineffective since budgeted costs at one level of activity are compared to actual costs at another level of activity Cost reports show whether food costs are controled and do not show whether variable costs are controlled. cost reports are effective since budgeted costs at one level of activity are compared to actual costs at another level of activity. cost reports show whether fixed costs and variable costs are controlled. 2. What kind of reports should be used to give better insight into how well departmental supervisors are controlling costs? Flexble budget performance reports must be used Fixed budget performance reports must be used 3. Complete the new performance report for the quarter, based on Flexible Budget Performance

Explanation / Answer

Cost reports are ineffective since budgeted costs at one level of activity are compared to actual costs at another level of activity.

The reports as presently prepared are of little use to the company. The problem is that the company is using a static budget to compare budgeted performance at one level of activity to actual performance at another level of activity. Although the reports do a good job of showing whether or not the budgeted level of activity was attained, they do not tell whether costs were controlled for the activity level that was actually worked during the period.

2. Flexible budget performance reports must be used.

The company should use a flexible budget approach to evaluate control over costs. Under the flexible budget approach, the actual costs incurred during the quarter in working 25,000 machine-hours should be compared to budgeted costs at that activity level.

Westmont Company

Overhead Performance Report—Assembly Department

For the Quarter Ended March 31

Budgeted machine-hours

30,000

Actual machine-hours

25,000

Budget 30,000 hours

Cost Formula (per MH)

Actual 25,000 hours

Budget 25,000 hours

Spending or Budget Variance

Variable costs:

Supplies

$ 8,100

$ 0.27

$ 7,500

$ 6,750

$ 750

Scrap

$ 25,500

$ 0.85

$ 23,800

$ 21,250

$ 2,550

Indirect materials

$ 84,000

$ 2.80

$ 72,200

$ 70,000

$ 2,200

Total variable cost

$ 3.92

$ 103,500

$ 98,000

$ 5,500

Fixed costs:

Wages and salaries

$ 70,300

$ 67,000

$ 3,300

Equipment depreciation

$ 97,000

Total cost

$ 270,800

$ 262,000

$ 8,800