MA23-45. Evaluating a Companywide Performance Report

Mr. Chandler, the production supervisor, bursts into your office, carrying the company's 2017 per-

formance report and thundering, "There is villainy here, sir! And I shall get to the bottom of it. I will

not stop searching until I have found the answer! Why is Mr. Richards so down on my department? I

thought we did a good job last year. But Richards claims my production people and I cost the company

$31,500! I plead with you, sir, explain this performance report to me." Trying to calm Chandler, you

take the report from him and ask to be left alone for 15 minutes. The report is as follows:

DICKENS COMPANY, LIMITED

Performance Report

For Year 2017

Actual Budget Variance

Unit sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 50 0

5,000

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $262,500 $225,000 $37,500 F

Less manufacturing costs

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,500 47,500 8,000 U

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 32,500 15,500 U

Manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . 40,000

32,000* 8,000 U

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (143,500)

(112,000) (31,500) U

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,000 113,000 6,000 F

Less selling and administrative expenses

Selling (all fixed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,800 40,000 17,800 U

Administrative (all fixed). . . . . . . . . . . . . . . . . . . . . . . . . 55,000

50,000 5,000 U

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112,800)

(90,000) (22,800)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,200 $23,000 $16,800 U

Performance summary

Budgeted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,000

Sales department variances

Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,500 F

Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,800 U

$19,700 F

Administration department variances . . . . . . . . . . . . . . 5,000 U

Production department variances . . . . . . . . . . . . . . . . . . 31,500 U

16,800 U

Actual net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,200

*Includes fixed manufacturing overhead of $22,000.

Required

a. Evaluate the performance report. Is Mr. Richards correct, or is there "villainy here"?

b. Assume that the Sales Department is a profit center and that the Production and Administration

Departments are cost centers. Determine the responsibility of each for cost, revenue, and income

variances, and prepare a report reconciling budgeted and actual net income. Your report should

focus on the performance of each responsibility center.