6.34 (LO 1) Flexible budgeting (CMA Adapted)

Spitzer Specialty Furniture manufactures furniture for specialty shops throughout the Southwest. With annual sales of $12 million, the company has four major product lines?bookcases, magazine racks, end tables, and bar stools?each of which managed by a different production manager. Since production is spread fairly evenly over the year, controller Sara Massey has prepared an annual budget that is divided into 12 monthly reporting periods. Spitzer uses a standard cost system and applies variable overhead on the basis of machine hours. Fixed manufacturing overhead is allocated to the product lines based on the square footage they occupy using a predetermined plantwide rate. The size of the occupied space varies considerably across product lines. At the monthly meeting to review June's results, Ken Ashley, manager of the bookcase line, received the following performance report:

Spitzer Specialty Furniture Bookcase Production Performance Report For the Month Ended June 30 Actual Budget Variance Units 3,000 2,500 500 F Sales Revenue $161,000 $137,500 $ 23,500 F Variable production expenses: Direct material 23,100 20,000 3,100 U Direct labor 18,300 15,000 3,300 U Overhead 60,200 51,250 8,950 U Fixed production expenses: Indirect labor 9,400 6,000 3,400 U Depreciation 5,500 5,500 Taxes 2,400 2,300 100 U Insurance 4,500 4,500 Administrative expense 12,000 9,000 3,000 U Marketing expense 8,300 7,000 1,300 U Research & development 6,000 4,500 1,500 U Operating income $ 11,300 $ 12,450 ($ 1,150 U) While distributing the performance report at the meeting, Sara remarked to Ken, "We need to talk about getting your division back on track. See me after the meeting." Ken had been so convinced that his division did well in June that Sara's remark surprised him. He spent the balance of the meeting avoiding eye contact with his fellow managers and trying to figure out what could have gone wrong. The monthly performance report was no help to him