Question

Evaluating a cost center (including flexible budgeting concepts) Paul Hammond, president of Hammond Door Products Company is evaluating the performance of Jason Burke, the plant manager, for the last fiscal year. Mr. Hammond is concerned that production costs exceeded budget by $50,000. He has available the 2018 static budget for the production plant, as well as the actual results, both of which follow Static Budget Actual Results Production in units Direct materials Direct labor Variable manufacturing overhead Total variable costs Fixed manufacturing overhead Total manufacturing cost 8,000 Doors $ 500,000 150,000 200.000 850,000 400.000 $1,250,000 8,400 Doors $ 522,500 159,250 212,000 893,750 406.250 $1,300,000 Required a. Convert the static budget into a flexible budget. b. Use the flexible budget to evaluate Mr. Burke's performance. c. Explain why Mr. Burke's performance evaluation doesn't include sales revenue and net income.

Answer 1

a.

	Static Budget	Actual Results	Flexible Budget
Production in units	8000	8400	8400
Direct materials	500,000	522,500	525,000
Direct labor	150,000	159,250	157,500
Variable manufacturing overhead	200,000	212,000	210,000
Total variable costs	850,000	893,750	892,500
Fixed manufacturing overhead	400,000	406,250	400,000
Total manufacturing cost	1,250,000	1,300,000	1,292,500

b

	Actual Results	Flexible Budget	Variance
Production in units	8400	8400
Direct materials	522,500	525,000	2,500	Favorable
Direct labor	159,250	157,500	1,750	Unfavorable
Variable manufacturing overhead	212,000	210,000	2,000	Unfavorable
Total variable costs	893,750	892,500	1,250	Unfavorable
Fixed manufacturing overhead	406,250	400,000	6,250	Unfavorable
Total manufacturing cost	1,300,000	1,292,500	7,500	Unfavorable

c. This evaluation does not include Revenue and Net Income because this performance review is of the PLANT MANAGER. Plant manager is responsible for all the costs not sales revenue. Sales team is responsible for all the sales.