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 0 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?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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 |
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 |
110,000 | 110,000 | 0 | |
| 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?
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