Flexible budgeting Spitzer Specialty Furniture manufactures furniture for specialty shops throughout the Southwest. With annual sales of $12 million, the company has four major product linesbookcases, magazine racks, end tables, and bar stoolseach 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 Junes 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

FSales Revenue$161,000 $137,500 $ 23,500

FVariable 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

UFixed production expenses: Indirect labor 9,400 6,000 3,400 U

Depreciation 5,500 5,500

Taxes2,400 2,300 100 U

Insurance4,500 4,500

Administrative expense 12,000 9,000 3,000

UMarketing expense 8,300 7,000 1,300

UResearch & development 6,000 4,500 1,500

UOperating 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 Saras 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.

a. Identify at least three weaknesses in the June production performance report.

b. Discuss the behavioral implications of Saras remark to Ken.

c. Prepare a more informative production performance report for June to assist in the evaluation of Kens division.

d. Discuss how your recommended changes in reporting are likely to affect Kens behavior.