Flexible Budgeting, Performance Measurement, and Ethics

Flexible Budgeting, Performance Measurement, and Ethics 1.

I can't entirely agree with the production manager that the manufacturing area did a good job controlling costs since the master budget accounts for 50,000 units. The actual budget involves the production and sale of 45,000 units. As a result, the units give a favorable variance of the underlying cost. Thus, the production manager is wrong since the manufacturing area has not successfully controlled the operational costs.

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FLEXIBLE BUDGETING2

2.

Particulars

Flexible Budget

45,000 units

50,000 units

55,000 units

Sales

$25

$1,125,000

$1,250,000

$1,375,000

Direct Materials

$4.50

$202,500

$225,000

$247,500

Direct Labor

$3.75

$168,750

$187,500

$206,250

Variable Factory

$2.25

$101,250

$112,500

$123,750

$1.50

$67,500

$75,000

$82,500

$12.00

$540,000

$600,000

$660,000

$13.00

$585,000

$650,000

$715,000

$100,000

$100,000

$100,000

$150,000

$150,000

$150,000

$250,000

$250,000

$250,000

Less Variable Expenses

Overhead Variable Selling and Admin Total Variable Expenses Contribution Margin Fixed Expense Fixed Factory Overhead Fixed Selling and Admin Total Fixed Expenses

FLEXIBLE BUDGETING3 Operating

$335,000

$400,000

$465,000

Income The variance for the operating income at 45,000 units totals to $335,000, at 50,000 units totals to $400,000, and that for 55,000 units amounts to $465,000.

3.

Particulars

Actual budget

Master budget

(45,000 units)

(45,000 units)

$25

$1,125,000

$1,125,000

0

Direct materials

$4.50

$212,500

$202,500

$10,000U

Direct labor

$3.75

$175,750

$168,750

$7,000U

Variable factory

$2.25

$110,250

$101,250

$9,000U

$1.50

$70,500

$67,500

$3,000U

$12.00

$569,000

$540,000

$29,000U

$13.00

$556,000

$585,000

$29,000U

$95,000

$100,000

$5,000F

Sales

Flexible budget

Variance

Less Variable Expenses

overhead Variable selling and admin Total variable expenses Contribution margin Fixed expenses Fixed factory overhead

FLEXIBLE BUDGETING4 Fixed selling and

$160,000

$150,000

$10,000U

$255,000

$250,000

$5,000U

$301,000

$335,000

$34,000U

admin Total fixed expenses Operating income From the revised performance report, 45,000 units accounts for $34,000 as the variance for operating income.

4.

For Montevideo Manufacturing Inc., the cost control depends on reducing the expenses on the business activities of the company. The management can assess this by determining each cost and evaluating whether they have favorable or unfavorable variance. The total variance for the direct manufacturing labor, direct materials, and variable factory overhead is $26,000. Thus, the manufacturing area did not do an excellent job of controlling the production costs.

Additionally, the variance under fixed factory overhead is $5,000 that is favorable. Thus, the favorable variance for fixed factory overhead may have resulted from an inaccurate estimate regarding the budget.

5.

Ethical professional practices are a code of ethics that outlines the required values and best practices of a business and the proper approach that the company can use to address the issue at hand. The standards in the ethical professional procedures that can apply to this situation include; competence and credibility. For competence, it helps an organization prepare complete and comprehensive reports that provide recommendations for the business based on relevant and reliable information presented by IMA under ethical professional practices. For credibility, it

FLEXIBLE BUDGETING5 enables the company to communicate appropriate and reasonable information to allow the user to understand it quickly. The user must understand the recommendations, reporting, and analysis to strengthen its code of ethics.