(Budget to actual comparison) Birmingham Chemical evaluates performance in part through the use of flexible budgets. The selling expense budgets at three activity levels within the relevant range follow.
|
Activity Measures |
|
|
|
|
Unit sales volume |
15,000 |
17,500 |
20,000 |
|
Dollar sales volume |
$15,000,000 |
$17,500,000 |
$20,000,000 |
|
Number of orders processed |
1,500 |
1,750 |
2,000 |
|
Number of salespersons |
100 |
100 |
100 |
|
Monthly Selling and Administrative Expenses |
|
|
|
|
Advertising and promotion |
$1,600,000 |
$1,600,000 |
$1,600,000 |
|
Administrative salaries |
80,000 |
80,000 |
80,000 |
|
Sales salaries |
100,000 |
100,000 |
100,000 |
|
Sales commissions |
600,000 |
700,000 |
800,000 |
|
Salesperson travel |
200,000 |
225,000 |
250,000 |
|
Sales office expense |
445,000 |
452,500 |
460,000 |
|
Shipping expense |
650,000 |
675,000 |
700,000 |
|
Total |
$ 3,675,000 |
$3,832,500 |
$3,999,000 |
The following assumptions were used to develop the selling expense flexible budgets:
- The average size of the company’s sales force during the year was planned to be 100 people.
- Salespersons are paid a monthly salary plus commission on gross dollar sales.
- The travel costs have both a fixed and a variable element. The fixed portion is related to the number of salespersons, and the variable portion tends to fluctuate with gross dollars of sales.
- Sales office expense is a mixed cost, with the variable portion related to the number of orders processed.
- Shipping expense is a mixed cost, with the variable portion related to the number of units sold. (An order consists of 10 units.)
A sales force of 90 persons generated a total of 1,600 orders, resulting in a sales volume of 16,000 units during November. The gross dollar sales amounted to$14.9 million. The selling expenses incurred for November were as follows:
|
Advertising and promotion |
$1,550,000 |
|
Administrative salaries |
80,000 |
|
Sales salaries |
101,000 |
|
Sales commissions |
609,000 |
|
Salesperson travel |
185,000 |
|
Sales office expense |
500,000 |
|
Shipping expense |
640,000 |
|
Total |
$3,665,000 |
a. Explain why the selling expense flexible budget would not be appropriate for evaluating the company’s November selling expense, and indicate how the flexible budget would have to be revised.
b. Determine the budgeted variable cost per salesperson and variable cost per sales order for the company.
c. Prepare a selling expense report for November that the company can use to evaluate its 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 variation.
d. Determine the actual variable cost per salesperson and variable cost per sales order processed for the company.
e. Comment on the effectiveness and efficiency of the salespersons during November.