Problem 925 Critiquing a Variance Report Preparing a Perform

Problem 9-25 Critiquing a Variance Report; Preparing a Performance Report [LO9-1, LO9-2, LO9-3, L09-4, 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: Aasembly Department Cost Report For the Nonth Ended March 31 Actual Planning Results Budget Variances Machine-hours Variable costs: Supplies Scrap Indirect naterials Fixed costs: Wages and salaries Equipment depreciation Total cost 35,000 40,000 29,700 32,000 $2,300 F 500 F 19,500 20,000 51,800 56,000 4,200 F 800 F 79,200 80,000 60,000 60,000 $240,200 $248,000 $7,800 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. The company\'s president is uneasy about the cost reports, identify at least two reasons. (Select \"X\" if the item is one of the reasons.) Cost reports are ineffective since budgeted costs at one level of activity are compared to actual costs at another level of acivity. 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 Cost reports show whether fixed costs and variable costs are controlled. 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 Complete the new performance report for the quarter, based on Flexible Budget Performance approach. (Do not round your intermediate calculations. Indicate the effect of each variance by selecting·F\" ror ravorable, \"U\" for unfavorable, and \"None\" ror no errect (i.e., zero variance), Input all amounts as positive values.) Flexible Budget Porformance Report For the Month Ended March 31 Flexible Budget Actual Planning 35,000 40,000 Supplies Scrap Indirect materials Wagos and salaries S 29,700 19,500 51,800 79,200 60,000 S 240,200 32,000 20,000 56,000 80,000 60,000 S 248,000 Total Were costs well controlled in March? Costs were well controlled °Costs were not well controlled

Solution

1) cost reports are ineffective since budgeted costs at one level of activity are compared to acutal costs at another level of activity. cost reports show whether fixed costs are controlled and do not show whether variable costs are controlled 2) flexible budget performance report should be used 3)                                   Flexible Budget Performance Report             Actual Spending variance Flexible Activity variance Planning results Budget Budget Machine hours 35,000 0 35,000 40,000 supplies 29,700 1,700 U 28000 4,000 F 32,000 Scrap 19,500 2,000 U 17500 2,500 F 20,000 indirect materials 51,800 2,800 U 49000 7,000 F 56,000 Wages and salaries 79,200 800 F 80,000 0 N 80,000 Equipment Depreciation 60,000 0 U 60,000 0 N 60,000 total 240,200 5,700 U 234500 13,500 F 248,000 (here wages & salaires and Equipment depreciation are fixed costs) Flexible budget = planning budget cost/40000*35000 4) costs were not well controlled