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:

9,900

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.

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 15,000 20,000 Variable costs: Supplies $ 9,300 $

9,900

$ 600 F Scrap 32,200 34,500 2,300 F Indirect materials 93,800 111,000 17,200 F Fixed costs: Wages and salaries 77,500 73,000 4,500

U

Equipment depreciation 103,000 103,000 – Total cost $ 315,800 $ 331,400 $ 15,600 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

A) The president is unhappy because of the two reasons: a) Less sales than budgeted and b) higher cost per unit than expected (270800/25000 = 10.84 > 281600/30000 = 9.37)

B) The report should also have budget cost aligned to actual units produced I.e. flexible budget which can show the cost that should have been incurred for the actual units produced)

C) Performance report:

       Planning Budget   Variances              
   Actual Results               Flexible Budget   Flexible budget variance  
Machine-hours   25,000   30,000         25000      
                       
Variable costs:                      
Supplies   7,500   8,100   600   F   6750   750   U
Scrap   23,800   25,500   1,700   F   21250   2,550   U
Indirect materials   72,200   84,000   11,800   F   70000   2,200   U
Fixed costs:                      
Wages and salaries   70,300   67,000   3,300   U   67000   3,300   U
Equipment depreciation   97,000   97,000   –      97000   0   U
Total cost   270,800   281,600   10,800   F   262000   8,800   U

The flexible budget has been calculated by multiplying the budget with actual units and dividing by budgeted units. Fixed cost have been kept same.

4. No, costs were not controlled, intact they were higher as can be seen from flexible budget.

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