Chapter 7, Problem 1MC

Flexible budgeting, performance measurement, and ethics

Montevideo Manufacturing, Inc. produces a single type of small motor. The bookkeeper who does not have an in-depth understanding of accounting principles prepared the following performance report with the help of the production manager.

In a conversation with the sales manager, the production manager was overheard saying, “You sales guys really messed up our May performance, and it is only because production did such a great job controlling costs that we aren’t in even worse shape.”

Required:

1. 1. Do you agree with the production manager that the manufacturing area did a good job of controlling costs?
2. 2. Prepare a flexible budget for Montevideo Manufacturing’s expenses at the following activity levels: 45,000 units, 50,000 units, and 55,000 units.
3. 3. Prepare a revised performance report, using the most appropriate flexible budget from (2) above.
4. 4. Now what is your response to the production manager’s claim?
5. 5. Assume that you have just been hired as the new accountant. You observe that the production manager is about to receive a large bonus based on the favorable materials, labor, and factory overhead variances indicated in the flexible budget prepared by the bookkeeper. Using the IMA Statement of Ethical Professional Practice as your guide, what standards, if any, apply to your responsibilities in this matter?