Several years ago, Westmont Corporation developed a comprehensive budgeting syst

Question

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:

10,800

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?

prepare a new performance report for the quarter, (Do not round your intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Required 2

Assembly Department
Cost Report
For the Month Ended March 31 Actual Results Planning Budget Variances Machine-hours 15,000 20,000 Variable costs: Supplies $ 10,200 $

10,800

$ 600 F Scrap 36,400 39,000 2,600 F Indirect materials 104,600 124,500 19,900 F Fixed costs: Wages and salaries 81,100 76,000 5,100

U

Equipment depreciation 106,000 106,000 – Total cost $ 338,300 $ 356,300 $ 18,000 F

Explanation / Answer

a) It is comparing the actuals with the planning budget which, is not proper as changes in activity is not considered in comparison. Further, it does not distinguish between changes in costs due to activity levels and changes due to spending/efficiency. b) A flexible budget performance report which gives comparison between Planned budget and flexible budget for changes in activity level and comparison between flexible budget and actuals for variances due to spending and efficiency in operations, will give better insights as to what is controllable and what is not. c) Flexible budget performance Report: Westmont Corporation Assembly Department Flexible Budget Performance Report For the Month Ended March 31 Actual Results Spending & Efficiency variances Flexible Budget Activity variances Planning Budget Machine-hours (q) 15,000 0 N 15000 5000 U 20,000 Variable costs: Supplies $10,200 $2,100 U $8,100 $2,700 F $10,800 Scrap 36,400 $7,150 U $29,250 $9,750 F 39,000 Indirect materials 104,600 $11,225 U $93,375 $31,125 F 124,500 Total variable costs 151,200 $20,475 U $130,725 $43,575 F 174,300 Fixed costs: Wages and salaries 81,100 $5,100 U 76000 $0 N 76,000 Equipment depreciation 106,000 $0 N 106000 $0 N 106,000 Total fixed costs 187,100 $5,100 U 182000 $0 N 182,000 Total costs $338,300 $25,575 U $312,725 $43,575 F $356,300 4) No. Costs were not well controlled in March. For this purpose the variances with flexible budget are to be analyzed. All the variable costs are high in comparison with the flexible budget, which is an indication of inefficient operations. The fixed costs of wages and salaries is also high showing higher spending.

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