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 $9,300 $ 9,900 $600F
Scrap 32,200 34,500 2,300F
Indirect materials 93,800 111,000 17,200F
Fixed costs:
Wages and salaries 77,500 73,000 4,500 U
Equipment depreciation 103,000 103,000 -
Total cost $315,800 $331,400 $15,600F
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 the Flexible Budget Performance approach.
4. Were costs well controlled in March?

Westmont Corporation

1. One reason is that the actual results shows that budget performance was not more than 75% but the actual variable costs were more than 75%.  Two, despite the above, the variance reports show a favorable outcome instead of an unfavorable one.

2. Using a flexible budget report will draw out better insight into the performance of the departmental supervisors and how they are controlling costs.

3. Assembly Department

Cost Report

For the Month Ended March 31

                                       Actual Results Flexible Budget Variances

Machine-hours                           15,000     20,000

Variable costs:

Supplies                                     $9,300     $ 7,425          $1,875 U

Scrap                                          32,200      25,875          6,325 U

Indirect materials                      93,800      83,250         10,550 U

Fixed costs:

Wages and salaries                  77,500       73,000          4,500 U

Equipment depreciation         103,000     103,000        -

Total cost                              $315,800  $292,550     $23,250 U

4. The above report shows that costs were not well controlled in March.  This contrasts with how performance was showed with the planning budget.

Explanation:

a) Data and Calculations:

Assembly Department

Cost Report

For the Month Ended March 31

                                       Actual Results Planning Budget Variances

Machine-hours                           15,000     20,000

Variable costs:

Supplies                                     $9,300     $ 9,900          $600 F

Scrap                                          32,200      34,500          2,300 F

Indirect materials                      93,800       111,000         17,200 F

Fixed costs:

Wages and salaries                  77,500       73,000          4,500 U

Equipment depreciation         103,000     103,000        -

Total cost                              $315,800   $331,400       $15,600 F

Flexing the budget:

Machine-hours                           15,000     20,000

Variable costs:

Supplies                                     $9,900 *15,000/20,000 = $7,425

Scrap                                          34,500 *15,000/20,000 = $25,875

Indirect materials                       111,000 *15,000/20,000 = $83,250

b) The flexible budget of the Assembly Department of Westmont Corporation shows that costs were overrun and overall variance was unfavorable unlike the report presented under the planning budget.

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