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: Assembly Department Cost Report For the Month Ended March 31 Actual Results Planning Budget Variances Machine-hours 25,000 30,000 Variable costs: Supplies $ 7,800 $ 8,400 $ 600 F Scrap 25,200 27,000 1,800 F Indirect materials 75,800 88,500 12,700 F Fixed costs: Wages and salaries 71,500 68,000 3,500 U Equipment depreciation 98,000 98,000 – Total cost $ 278,300 $ 289,900 $ 11,600 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. 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?

Explanation / Answer

1. Two reasons as to why the company 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 of $9050 thus showing that costs were not controlled well in March.

Westmont Corporation 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 8400 1400 Favorable 7000 800 Unfavorable 7800 Scrap 27000 4500 Favorable 22500 2700 Unfavorable 25200 Indirect materials 88500 14750 Favorable 73750 2050 Unfavorable 75800 Total variable cost 123900 20650 Favorable 103250 5550 Unfavorable 108800 Fixed costs: Wages and salaries 68000 0 None 68000 3500 Unfavorable 71500 Equipment depreciation 98000 0 None 98000 0 None 98000 Total fixed cost 166000 0 None 166000 3500 Unfavorable 169500 Total cost 289900 20650 Favorable 269250 9050 Unfavorable 278300

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