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	$	7,200	$	7,800	$	600	F
Scrap		22,400		24,000		1,600	F
Indirect materials		68,600		79,500		10,900	F
Fixed costs:
Wages and salaries		69,100		66,000		3,100	U
Equipment depreciation		96,000		96,000		–
Total cost	$	263,300	$	273,300	$	10,000	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. Cost reports are ineffective as budgeted costs at one level of activity are compared to actual costs are another level of activity

Cost reports shows whether fixed costs are controlled and do not show whether variable costs are controlled.

2. Flexible budget performance report

3.

	Actual results	Spending variance		Flexible budget	Activity variance		Planning budget
Machine hrs	25000			25000			30000
Supplies	7200	700	U	6500	1300	F	7800
Scrap	22400	2400	U	20000	4000	F	24000
indirect metrials	68600	2350	U	66250	13250	F	79500
wages and salaries	69100	3100	U	66000	0	-	66000
Depreciation	96000	0	-	96000	0	-	96000
Total	263300	8550	U	254750	18550		273300

4. Costs were not well controlled