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Cost and performance reports for Shipley Corporation

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Several years ago, Shipley Corporation developed a comprehensive budgeting system for profit planning and control purposes. While departmental supervisors have been happy with the system, the factory manager has expressed considerable dissatisfaction with the information being generated by the system.
A typical departmental cost report for a recent period follows:

Assembly Department
Cost Report
For the Month Ended March 31
Budget Actual
Results Variances
Machine-hours 30,000 25,000
Variable costs:
Supplies $ 6,000 $ 5,400 $ 600 F
Scrap 15,000 14,000 1,000 F
Indirect materials 52,500 47,000 5,500 F
Fixed costs:
Wages and salaries 60,000 61,900 1,900 U
Equipment depreciation 90,000 90,000 -

Total cost $ 223,500 $ 218,300 $ 5,200 F

After receiving a copy of this cost report, the supervisor of the Assembly Department stated, "These reports are super. It makes me feel really good to see how well things are going in my department. I can't understand why those people upstairs complain so much about the reports."

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.


1. The company's president is uneasy about the cost reports, what can be the reason? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Cost reports are ineffective as budgeted costs at one level of activity is compared to actual costs at another level of activity
Cost reports shows whether fixed costs are controlled and do not show whether variable costs are controlled
Cost reports are effective as budgeted costs at one level of activity is compared to actual costs at another level of activity
Cost reports shows whether fixed costs and variable costs are controlled

2. What kind of reports should be used to give better insight into how well departmental supervisors are controlling costs?

Flexible budget performance reports must be used
Fixed budget performance reports must be used

3. Complete the new performance report for the quarter, based on answer to (2) above. (Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.)

Assembly Department
Performance Report
For the Month Ended March 31
Activity Variances Budget Revenue and Spending Variances

Indirect materials
Wages and salaries
Equipment depreciation

4. Whether cost were controlled in the Assembly Department in march?

Costs were well controlled
Costs were not well controlled

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Solution Summary

I have created a flexible budget for you in Excel to analyze the variable costs. I was not sure about the formatted report on the screen (it was a strange format) so I'll let you complete it from my work.

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