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Problem 1-4: Performance Reports: below is a performance report that compares
budgeted and actual profit in the sporting goods department of Maxwell’s department
store for the month of December.
Maxwell’s department store
Sporting Goods
Performance Report
December 2008
Sales
Less:
Cost of merchandise
Salaries of sales staff
Controllable profit
Budget
$600, 000
Actual
$675,000
Difference
$75,000
$300,000
$60,000
$240,000
$375,000
$68,000
$232,000
$75,000
$8,000
$8,000
Required:
A. Evaluate the department in terms of its increases in sales and expenses. Do you
believe it would be useful to investigate either or both of the increase in expenses?
% increase = Difference amount / Budgeted Value
For sales, the increase = 75,000/600,000 = 12.5%
In the same ways the increase for sales and expenses is
Increase in Sales
12.5%
Increase in cost of merchandise
25.0%
Increase in salaries
13.3%
Looking at the percentages, it would be useful to investigate the increase in expenses
only. The reason is that the increase in expenses is a higher percentage than the
increase in sales which implies that expenses are rising much more than they should
be given the increase in sales.
B. Consider storewide electricity cost. Would this cost be a controllable or
noncontrollable cost for the manager sporting goods? Would it be useful to
include a share of storewide electricity cost on the performance report for sporting
goods?
The electricity cost is a storewide cost and so would be not be controllable at the
level of sporting goods department. It would not be useful to include a
noncontrollable cost in the performance report. The reason is that performance
should be based on what can be controlled by the manager. If we evaluate manager
on noncontrollable costs, the manager cannot be held responsible since the costs are
not in the control of the manager.
Problem 1-5. Performance report: At the end of 2008. Cyril Fedako, CFO for Fedako
products, received a report comparing budgeted and actual production costs for the
company’s plant in forest lake, Minnesota:
Manufacturing costs
Forest lake plant
Budget versus actual 2008
Budget
Materials
$3,000,000
Direct labor
2,100,000
Supervisory salaries
375,000
Utilities
75,000
Machine maintenance
250,000
Depreciation of building
50,000
Depreciation of equipment 200,000
Janitorial
120,000
Total
$6,170,000
Actual
Difference
$3,300,000
$300,000
2,300,000
200,000
400,000
25,000
85,000
25,000
280,000
10,000
50,000
-0205,000
5,000
135,000
15,000
6,755,000
585,000
His first thought was that costs must be out of control since actual costs exceed the
budget by $585,000. However, he quickly recalled that the budget was set assuming a
production level of $50,000 units. The forest lake plant actually produced $55,000 units
in 2008.
Required:
A. Given that production was greater than planned, should Cyril expect that all actual
costs will be greater than budgeted? Which costs would you expect to increase,
and which costs would you expect to remain relatively constant?
I would expect variable costs to increase and fixed costs to remain constant, variable
costs would include: Materials, direct labor and utilities
B. Cyril is extremely busy-the company has six other plants. Therefore, he cannot
spend time investigation every department from the budget. With this in mind,
which costs should Cyril concentrate on his investigation of budget differences?
Material
Budget
at 50,000
units
3,000,000
Flexible Actual
At 55,000 At 55,000
units
units
Change
% change
-
0%
3,300,000 3,300,000
Direct labor
2,100,000
2,310,000 2,300,000
(10,000)
-0.43%
Supervisory salaries
375,000
375,000
400,000
25,000
6.67%
Utilities
75,000
82,500
85,000
2,500
3.03%
Machine maintenance
250,000
250,000
280,000
30,000
12.00%
Depreciation of building
50,000
50,000
50,000
-
0.00%
Depreciation of equipment
200,000
200,000
205,000
5,000
2.50%
Janitorial
120,000
120,000
135,000
15,000
12.50%
67,500
1.01%
Total
6,170,000
6,687,500 6,755,000
Variable Costs (materials, labor and utilities costs) are adjusted for the new level of
production while fixed costs remain constant. Cyril can set up a percentage limit
below which the costs would not be investigated. Suppose the limit is set at 5%, then
the costs to be investigated are Supervisory Salaries, Machine maintenance and
Janitorial costs since these deviate by the higher percentage. Having said that, I
would still recommend that any deviations no matter how minimal they are should
be investigated