BM 220 MANAGEMENT ACCOUNTING & CONTROL

Kathleen Mae B. Cornista May 13, 2017

Situtational Short Case

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.

The flexible budget performance report provides a much clearer picture of

the performance of the Assembly Department than the original cost report. The
overall activity variance is P7,300 U (unfavorable) which simply reflects the fact that
the actual level of activity (35,000 machine hours) was significantly lesser than the
budgeted level of activity (40,000). This would lead to the variable costs being
naturally more than budgeted.

 BM 220 MANAGEMENT ACCOUNTING & CONTROL

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

BUDGETED MACHINE HOURS 40,000

ACTUAL MACHINE HOURS 35,000

Variable Costs:

Supplies 32,000 0.80 28,000 29,700 1,700 UNFAVORABLE

Scrap 20,000 0.5 17,500 19,500 2,000 UNFAVORABLE

Indirect materials 56,000 1.4 49,000 51,800 2,800 UNFAVORABLE

TOTAL VARIABLE COST 108,000 94,500 101,000 6,500 UNFAVORABLE

Fixed Costs: 189,000

Wages and salaries 80,000 80,000 79,200 800 FAVORABLE

Equipment Depreciation 60,000 60,000 60,000 0

TOTAL FIXED COST 140,000 140,000 139,200 800 FAVORABLE

TOTAL OVERHEAD COST 248,000 234,500 240,200 7,300 UNFAVORABLE

4. How well were costs controlled in the Assembly Department in March?

Evidently, costs were not controlled well in the Assembly Department in

March. Wages and salaries may have been minimized due to the lesser actual
machine hours, but the variable costs were greater than the flexible budget and the
overall activity variance was P7,300 U (unfavorable).

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.