Question

Problem 9-25 Critiquing a Variance Report; Preparing a Performance Report [LO9-1, LO9-2, LO9-3, LO9-4, LO9-6]

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	$	8,100	$	8,700	$	600	F
Scrap		26,600		28,500		1,900	F
Indirect materials		79,400		93,000		13,600	F
Fixed costs:
Wages and salaries		72,700		69,000		3,700	U
Equipment depreciation		99,000		99,000		–
Total cost	$	285,800	$	298,200	$	12,400	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, 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?

Answer 1

1. The two reasons the company's 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.

Assembly Department
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	8700	1450	Favorable	7250	850	Unfavorable	8100
Scrap	28500	4750	Favorable	23750	2850	Unfavorable	26600
Indirect materials	93000	15500	Favorable	77500	1900	Unfavorable	79400
Total variable cost	130200	21700	Favorable	108500	5600	Unfavorable	114100
Fixed costs:
Wages and salaries	69000	0	None	69000	3700	Unfavorable	72700
Equipment depreciation	99000	0	None	99000	0	None	99000
Total fixed cost	168000	0	None	168000	3700	Unfavorable	171700
Total cost	298200	21700	Favorable	276500	9300	Unfavorable	285800

4. Based on the flexible budget it is seen that there was an unfavorable spending variance thus showing that costs were not controlled well in March.