Berwin, Inc., is a manufacturer of small Industrial tools with annual sales of approximately

$3.5 million. Sales growth has been steady during the year, and there is no evidence of cycli¬

cal demand. Production has increased gradually during the year and has been evenly dis¬

tributed throughout each month. The company has a sequential processing system. The four manufacturing departments—Casting, Machining, Finishing, and Packaging—are all located in the same building. Fixed overhead is assigned using a plantwide rate.

Berwin has always been able to compete with other manufacturers of small tools.
However, its market has expanded only in response to product innovation. Thus, research and development is very important and has helped Berwin to expand as well as maintain demand.
Carla Viller, controller, has designed and implemented a new budget system in response to concerns voiced by George Berwin, president. Carla prepared an annual budget that has been divided into 12 equal segments; this budget can be used to assist in the timely evalu¬
ation of monthly performance. George was visibly upset upon receiving the May perfor¬
mance report for the Machining Department. George exclaimed, "How can they be efficient enough to produce nine extra units every working day and still miss the budget by $300 per day?" Gene Jordan, supervisor of the Machining Department, could not understand "all the red ink" when he knew that the department had operated more efficiently in May than it had in months. Gene stated, "1 was expecting a pat on the back and instead the boss tore me apart. What's more, I don't even know why!"

Required:
1. Review the May performance report. Based on the information given in the report and elsewhere:

a. Discuss the strengths and weaknesses of the new budgetary system.

b. Identify the weaknesses of the performance report, and explain how it should be revised to eliminate each weakness.
2. Prepare a revised report for the Machining Department using the May data.
3. What other changes would you make to improve Berwin's budgetary system?

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Berwin, Inc. Machining Department Performance Report For the Month Ended May 31 Budget Actual Variance Volume in units Variable manufacturing costs: 3,000 3,185 185 F Direct materials $24,000 $ 24,843 $ 843 U Direct labor 27,750 29,302 1,552 U Variable overhead 33,300 35,035 1,735 U Total variable costs $85,050 $ 89,180 $4,130 U Fixed manufacturing costs: Indirect labor $ 3,300 $ 3,334 $ 34 U Depreciation 1,500 1,500 Taxes 300 300 Insurance 240 240 Other 930 1,027 97 U Total fixed costs $ 6,270 $ 6,401 $ 131 U Corporate costs: Research and development $ 2,400 $ 3,728 $1,328 U Selling and administrative 3,600 4,075 Total corporate costs Total costs $ 6,000 $97,320 $ 7,803 475 U $1,803 U $103,384 $6,064 U