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 cyclical demand. Production has increased gradually during the year and has been evenly distributed throughout each month. The company has a sequential processing system. The four manufacturing departmentsCasting, Machining, Finishing, and Packagingare 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 Pete 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 evaluation of monthly performance. Pete was visibly upset upon receiving the May performance report for the Machining Department. Pete exclaimed, How can it be efficient enough to produce nine extra units every working day and still miss the budget by $300 per day? Sam 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. Sam stated, I was expecting a pat on the back and instead the boss tore me apart. Whats more, I dont even know why!

Required:

1. Review the May performance report on the following page. Based on the information given in the report and elsewhere:
   1. Discuss the strengths and weaknesses of the new budgetary system.
   2. 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 Berwins budgetary system?

Berwin, Inc.

Machining Department Performance Report

For the Month Ended May 31

Budget Actual Variance

Volume in units 3,000 3,185 185 F

Variable manufacturing costs:

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 4,075 475 U

Total corporate costs $ 6,000 $ 7,803 $1,803 U

Total costs $97,320 $103,384 $6,064 U