Problem:
Overnight Shipping Company uses departmental budgets and performance reports in planning and controlling its processing operations.
The following annual performance report for the company's department was presented to the president of the company:
Overnight Shipping Company
Performance report
Annual report for the Year Ended December 31, 2005
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Actual |
Budget |
Variance |
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| # of packages processed |
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14600 |
16000 |
(1,400) |
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| Variable Costs: |
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Variable overhead |
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$ 57,000 |
$ 56,000 |
$ 1,000 |
U |
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Direct labor |
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80,800 |
84,000 |
$ (3,200) |
F |
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Indirect Labor |
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24,100 |
28,000 |
$ (3,900) |
F |
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Indirect materials |
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16,200 |
19,200 |
$ (3,000) |
F |
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Total variable costs |
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178,100 |
187,200 |
(9,100) |
U |
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| Fixed Costs |
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Office Rent |
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$ 14,400 |
$ 14,400 |
- |
F |
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Salaries |
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32,300 |
32,000 |
300 |
F |
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Depreciation |
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10,200 |
10,200 |
- |
F |
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Total Fixed Costs |
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56,900 |
56,600 |
300 |
U |
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Total Cost |
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235,000 |
243,800 |
(8,800) |
F |
Although processing volume of 16,000 units was originally budgeted for, the actual volume was only 14,600.
The department manager is very happy with this cost variance report. But, the President of the company wants a more detailed report. He has asked you to develop a performance report that gives a better picture of how the department has controlled costs.
Required:
1. Prepare a new performance report for the year using the flexible budget approach.
The variable and fixed cost labeling has been set correctly, so do not change this around. Comment on how you developed this revised report and what it means.
Use the excel "IF" statement (located under Insert - Function) to designate if the variance is favorable or unfavorable.
2. Do you think any of the variances in the report you prepared should be investigated? Why?