Question

Required 1 Required 2 Required 3 Required 4 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 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. <Required 1 Required 2
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 15,000 20,000 Variable costs: Supplies $ 11,400 $ 12,000 $ 600 F Scrap 42,000 45,000 3,000 F Indirect materials 119,000 142,500 23,500 F Fixed costs: Wages and salaries 85,900 80,000 5,900 U Equipment depreciation 110,000 110,000 – Total cost $ 368,300 $ 389,500 $ 21,200 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 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		15,000	0		15,000			20,000
	supplies		11,400	2,400	U	9000	3,000	F	12,000
	Scrap		42,000	8,250	U	33750	11,250	F	45,000
	indirect materials		119,000	12,125	U	106875	35,625	F	142,500
	Wages and salaries		85,900	5,900	U	80,000	0	N	80,000
	Equipment Depreciation		110,000	0	U	110,000	0	N	110,000
	total		368,300	28,675	U	339625	49,875	F	389,500
	(here wages & salaires and Equipment depreciation are fixed costs)
	Flexible budget = planning budget cost/20000*15000
4)	costs were not well controlled