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SoftGro Flexible Budgeting

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Mark Fletcher, president of SoftGro, Inc., was looking forward to seeing the performance reports for Novemeber because he knew the company's sales for the month had exceeded budget by a considerable margin. SoftGro, a distributor of educational software packages, had been growing steadily for approximately two years. Flecther's biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavorable variance in the company's Monthly selling Expense Report that follows.

Refer to the attachment for the monthly selling expense report.

Flecther called in the company's new controller; Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the company's reporting format might not be giving Fletcher a true picture of the company's operations. She proposed that SoftGro implement flexible budgeting. Porter offered to redo the Monthly Selling Expense Report for November using flexible budgeting so that Fletcher could compare the two reports and see the advantages of the flexible budgeting.

* The total compensation paid to the sales force consists of a monthly base salary and a commission; the commission varies with sales dollars.
* Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of office expense is $3,000,000 annually and is incurred uniformly throughout the year
* Subsequent o the adoption of the annual budget for current year; SoftGro decided to open a new sales territory. As a consequence, approval was given to the hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report.
* Per diem reimbursement o the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. SoftGro's original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month.
* the company's shipping expense is a semi variable cost with the variable portion, $3.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year.

1. Citing the benefits of flexible budgeting, explain why Susan Porter would propose the SoftGro use flexible budgeting in this situation.
2. Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluator SoftGro's control over selling expenses. The report should have a line for each selling expense item showing the appropriate budgeted amount, the actual selling expense, and the monthly dollar variance.

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1. Citing the benefits of flexible budgeting, explain why Susan Porter would propose the SoftGro use flexible budgeting in this situation.
Susan Porter should recommend flexible budgeting here because it would allow Fletcher to compare SoftGro's actual selling expenses (based on current month's actual activity) with the previously budgeted selling expenses. Some benefits of flexible budgets are that they provide management with tools to help evaluate the effects of varying levels of activity on costs, ...

Solution Summary

Citing the benefits of flexible budgeting, explain why Susan Porter would propose the SoftGro use flexible budgeting in this situation. "Susan Porter should..."

The solution provides a reasonable explanation along with a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoftGro's control over selling expenses.

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