HOW DO YOU MESS UP MY BUDGET?

Turi Luv, the vice president of marketing at Alektra Blue Industries, Inc., is angry and depressed. It is only early August, and he has just received a report from the company's printing and graphic design services showing that her marketing departments has exceeded its budget for printing for the year! The report appears as follows:

Printing and Graphic Design Services, Budget Variance Statement

For the Alektra Blue Marketing Department, January - July

Actual ExpenseAnnual BudgetOver (Under)

$4,350$4,200$150

Romi Rain, the corporation CEO, demands Gina must either stop using the service or obtain approval of a supplemental budget request from the company CFO, Shyla Stylez. Ms. Luv pulls out her latest statement from June and finds that actual charges at that time were $1,830. Since the main manufacturing plant was shut down for a major overhaul during most of July, she wonders how $2,520 could have been incurred in July.

Turi discovers that costs for the printing and graphic design services in July were $6,300, of which $700 was for paper, $2,000 for salaries, $2,000 for machine rentals and $1,600 for general overhead (allocated share of all general and administrative, utilities, depreciation, etc.). A total of 35,000 prints were made in July, a relatively low number because of the shutdown. However, several salespersons in the marketing department had a substantial amount of printing done for the winter catalogs and promotion mailers that will not be distributed until September. The marketing department was responsible for 14,000 of the 35,000 prints. The $2,520 charge was computed by dividing total printing and graphic design services cost for the month by the number of prints $6,300/35,000) to arrive at a charge of $0.18 per print. Turi also learned that during a typical month about $8,600 in cost is incurred and 150,000 prints are processed. Paper is the only variable cost.

REQUIRED:

1.Evaluate the cost allocation system used.

2.Based on the annual budget. What should be Ms. Luv's monthly expense for printing and graphic design services?

3.From the information given, what is the Printing and Graphic Design Services total annual budget?

4.What amount of fixed costs should Printing and Graphic Design incur during the year?

5.It appears that this is a static budget. Would it benefit the company switching to a variable budget?

6.Based what you have researched, please make up a budget for only the month of July that will indicate that is more favorable for the marketing department.

7.Now the hard part. Turi has asked to meet with Romi Rain and Shyla Stylez to discuss her budget. Please recommend what Turi should say to Romi and Shyla in order to convice them to change the corporate budget system.