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1.The company’s president is uneasy about the cost reports and would like you to
evaluate their usefulness to the company.
The company’s President has every right to be uneasy about the cost reports
generated by the system. The cost reports presented does not serve their purpose
because assessing how well costs were controlled for the actual activity level
during the period. The main problem is that the company is using static budget,
which erroneously compares budgeted costs at one level of activity to actual costs
at another level of activity. So naturally costs that are variable will be different at the
two levels of activity. Although the cost reports do a good job of showing whether
fixed costs are controlled and if the budgeted level was attained, they do not show
whether variable costs are controlled for the actual activity level.
2. What changes, if any, should be made in the reports to give better insight into
how well departmental supervisors are controlling costs?
A flexible budget approach must be used in evaluating cost control. The company
should use a flexible budget approach to evaluate control over costs. Under the
flexible budget approach, the actual costs incurred during the quarter in working
35,000 machine hours should be compared to budgeted costs at that activity
level.
First, we have to get the cost per machine hour based on the budgeted machine
hours. For that we simply divide variable costs in the planning budget by 40,000
machine hours. Then we can now calculate the flexible budget for the variable
costs by multiplying the cost per machine to the actual machine hours of 35,000.
Fixed costs for the flexible budget shall remain the same.
3.Prepare a new performance report for the quarter, incorporating any changes you
suggested in question (2) above.
Assembly Department
Cost Report
For the Month Ended March 31
COST
FLEXIBLE ACTUAL
PLANNING PER
BUDGET RESULTS VARIANCES
BUDGET MACHINE
(35,000 MH) (35,000 MH)
HOUR
Variable Costs:
This may be the reason that 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. Because the budget they were setting was
insufficient for their budgeted machine hours.