GEM Associates is reeling from a decline in profits because of competition.For its most recent year end, its controller has prepared following variance analysis and concluded that the company has done very well controlling its costs:

BudgetedActualVariance

Variable costs:

Professional Labour$1,000,000$ 940,000$60,000F

Travel50,00040,00010,000F

Supplies100,00090,00010,000F

Fixed Costs:

Professional Labour400,000 405,000(5,000)U

Facilities Cost250,000 265,000(15,000)U

Insurance80,00078,0002,000F

Totals$1,880,000$1,818,000$62,000F

For the year GEM Associates projected that it would generate $2,000,000 of revenues; it actually generated $1,800,000.The company has consulted with you for help in understanding what is happening.You decide to address the following items.

a)What are the major weaknesses in the report above?

b)Recast the report (using a flexible budget instead of the static one presented) to enable a more meaningful way to enable cost control evaluation.

c)GEM Associates uses a management by exception philosophy.Use the report you prepared in (b) above and explain which costs are likely to receive additional investigation.