Preparing a Flexible Budget and Evaluating Performance
P 2. Home Products Company manufactures a complete line of kitchen glassware.
The Beverage Division specializes in 12-ounce drinking glasses. Erin Fisher,
the superintendent of the Beverage Division, asked the controller to prepare a
report of her division’s performance in April. The following report was handed to
her a few days later:
Cost Category Budgeted Actual Difference Under
(Variable Unit Cost) Costs* Costs (Over) Budget
Direct materials ($.10) $ 5,000 $ 4,975 $ 25
Direct labor ($.12) 6,000 5,850 150
Variable overhead
Indirect labor ($.03) 1,500 1,290 210
Supplies ($.02) 1,000 960 40
Heat and power ($.03) 1,500 1,325 175
Other ($.05) 2,500 2,340 160
Fixed overhead
Heat and power 3,500 3,500 ”
Depreciation 4,200 4,200 ”
Insurance and taxes 1,200 1,200 ”
Other 1,600 1,600 ”
Totals $28,000 $27,240 $760
*Based on normal capacity of 50,000 units.
In discussing the report with the controller, Fisher stated, “Profits have been
decreasing in recent months, but this report indicates that our production process
is operating efficiently.”
Required
1. Prepare a flexible budget for the Beverage Division using production levels of
45,000 units, 50,000 units, and 55,000 units.
2. What is the flexible budget formula?
3. Assume that the Beverage Division produced 46,560 units in April and that
all fixed costs remained constant. Prepare a revised performance report similar
to the one above, using actual production in units as a basis for the budget
column.
4. Which report is more meaningful for performance evaluation, the original
one above or the revised one? Why?