PR 11-42 (Algo) Flexible Budget; Performance Report (LO 11-1, 11-6) Tyrone Fletcher, president of SoftGro, Incorporated, was looking forward to seeing the performance reports for November 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. Fletcher'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. Unit sales Dollar sales Orders processed Sales personnel per month Advertising Staff salaries Sales salaries Commissions SOFTGRO, INCORPORATED Monthly Selling Expense Report For the Month of November Annual Budget 2,090,000 $ 154,660,000 $ 22,052,000 November Budget November Actual 298,000 November Variance 334,000 36,000 $ 24,716,000 $ 2,664,000 64,800 90 7,400 90 6,700 96 (700) 6 $ 3,000,000 $ 3,023,000 $ 23,000 U 260,000 260,000 0 180,000 192,600 12,600 U 882,080 988,640 106,560 U 324,000 350,900 26,900 U 700,800 2,103,000 37,200 F 181,000 U $ 36,000,000 3,120,000 2,160,000 6,186,400 3,888,000 7,963,200 14,148,000 $ 73,465,600 Per diem expense Sales office expense Shipping expenses Total expenses 663,600 1,922,000 $ 7,231,680 $ 7,618,940 $ 387,260 U Fletcher 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 flexible budgeting. Porter discovered the following information about the behavior of SoftGro's selling expenses. • 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 $5,760,000 annually and is incurred uniformly throughout the year. • Subsequent to the adoption of the annual budget for the current year, SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report. • Per diem reimbursement to 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. Actual travel days per salesperson in November were equal to the 15 days budgeted. • The company's shipping expense is a semivariable cost with the variable portion, $6.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year. Required: 1. Why would Susan Porter propose that SoftGro use flexible budgeting in this situation? 2. Prepare a revised Monthly Selling Expense Report for November that would permit Tyrone Fletcher to more clearly evaluate SoftGro's control over selling expenses. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Why would Susan Porter propose that SoftGro use flexible budgeting in this situation? Note: Select "Yes" if the statement is a benefit of allocating utility costs to the divisions, and "No" if it is not benefit. Flexible budgeting provides management with the tools to evaluate the effects of varying levels of activity on costs, revenues, and profits. Flexible budgeting has a direct impact on actual results. Flexible budgeting improves the analysis of actual results. Flexible budgeting enables management to improve planning and decision making.

PR 11-42 (Algo) Flexible Budget; Performance Report (LO 11-1, 11-6) Tyrone Fletcher, president of SoftGro, Incorporated, was looking forward to seeing the performance reports for November 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. Fletcher'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. Unit sales Dollar sales Orders processed Sales personnel per month Advertising Staff salaries Sales salaries Commissions SOFTGRO, INCORPORATED Monthly Selling Expense Report For the Month of November Annual Budget 2,090,000 $ 154,660,000 $ 22,052,000 November Budget November Actual 298,000 November Variance 334,000 36,000 $ 24,716,000 $ 2,664,000 64,800 90 7,400 90 6,700 96 (700) 6 $ 3,000,000 $ 3,023,000 $ 23,000 U 260,000 260,000 0 180,000 192,600 12,600 U 882,080 988,640 106,560 U 324,000 350,900 26,900 U 700,800 2,103,000 37,200 F 181,000 U $ 36,000,000 3,120,000 2,160,000 6,186,400 3,888,000 7,963,200 14,148,000 $ 73,465,600 Per diem expense Sales office expense Shipping expenses Total expenses 663,600 1,922,000 $ 7,231,680 $ 7,618,940 $ 387,260 U Fletcher 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 flexible budgeting. Porter discovered the following information about the behavior of SoftGro's selling expenses. • 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 $5,760,000 annually and is incurred uniformly throughout the year. • Subsequent to the adoption of the annual budget for the current year, SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report. • Per diem reimbursement to 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. Actual travel days per salesperson in November were equal to the 15 days budgeted. • The company's shipping expense is a semivariable cost with the variable portion, $6.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year. Required: 1. Why would Susan Porter propose that SoftGro use flexible budgeting in this situation? 2. Prepare a revised Monthly Selling Expense Report for November that would permit Tyrone Fletcher to more clearly evaluate SoftGro's control over selling expenses. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Why would Susan Porter propose that SoftGro use flexible budgeting in this situation? Note: Select "Yes" if the statement is a benefit of allocating utility costs to the divisions, and "No" if it is not benefit. Flexible budgeting provides management with the tools to evaluate the effects of varying levels of activity on costs, revenues, and profits. Flexible budgeting has a direct impact on actual results. Flexible budgeting improves the analysis of actual results. Flexible budgeting enables management to improve planning and decision making.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 18E: Carmichael Corporation is in the process of preparing next years budget. The pro forma income...

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