Responsibility accounting reports) Hendrix Inc. manufactures industrial tools and has annual sales of approximately $3.5 million with no evidence of cyclical demand. R&D is very important to Hendrix because its market share expands only in response to product innovation.

The company controller has designed and implemented a new annual budget system divided into 12 equal segments for use for monthly perfor¬ mance evaluations. The vice president of operations was upset upon receiv¬ ing the following responsibility report for the machining department for October 2006:

a. Identify the weaknesses in the responsibility report for the machining department.

b. Prepare a revised responsibility report for the machining department that reduces or eliminates the weaknesses indicated in part (a).

c. Deviations in excess of 5 percent of budget are considered material and worthy of investigation. Should any of the machining department's vari- ances be investigated? Regardless of materiality, is there any area that the vice president of operations might wish to discuss with the manager of the machining department? (CMA adapted) LO.1

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MACHINING DEPARTMENT Responsibility Report For the Month Ended October 31, 2006 (in $000s) Budget Actual Variance Volume in units 3,000 3,185 185 F Variable manufacturing costs Direct material $24,000 $ 24,843 $ 843 U Direct labor 27,750 29,302 Variable factory overhead 33,300 35,035 Total $85,050 $ 89,180 1,552 U 1,735 U $4,130 U Fixed manufacturing costs Indirect labor $ 3,300 $ 3,334 $ 34 U Depreciation 1,500 1,500 Property tax 300 300 0 Insurance Other 240 240 0 930 1,027 97 U Total $ 6,270 $ 6,401 $ 131 U Corporate costs Research and development $ 2,400 $ 3,728 Selling and administration Total Total costs 3,600 $ 6,000 $97,320 4,075 $1,328 U 475 U $ 7,803 $1,803 U $103,384 $6,064 U