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 typical departmental cost report for a recent period 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	$	6,600	$	7,200	$	600	F
Scrap		19,600		21,000		1,400	F
Indirect materials		61,400		70,500		9,100	F
Fixed costs:
Wages and salaries		66,700		64,000		2,700	U
Equipment depreciation		94,000		94,000		–
Total cost	$	248,300	$	256,700	$	8,400	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, 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 fixed costs are controlled 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?

	Flexible 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 approach. (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.)

      

4.

Were costs well controlled in March?

	Costs were well controlled
	Costs were not well controlled

Answer 1

1
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 fixed costs and variable costs are controlled.
2
Flexible budget performance reports must be used
3
	Actual results	Spending variances		Flexible budget	Activity variances		Planning budget
Machine hours	25000			25000			30000
Supplies	6600	600	U	6000	1200	F	7200
Scrap	19600	2100	U	17500	3500	F	21000
Indirect materials	61400	2650	U	58750	11750	F	70500
Wages and salaries	66700	2700	U	64000	0	None	64000
Equipment depreciation	94000	0	None	94000	0	None	94000
Total	248300	8050	U	240250	16450	F	256700
4
Costs were not well controlled