Mark Fletcher, president of SoftGro, Inc., was looking forward to seeing the performance reports for November because he knew the companys sales for the month had exceeded budget by a considerable margin. SoftGro, a distributor of educational software packages, had been growing steadily for approximately two years. Fletchers biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavorable variance in the companys Monthly Selling Expense Report that follows.

SoftGro, Inc.

Monthly Selling Expense Report

For the Month of November

Annual Budget November Budget November Actual November Variance

Unit sales 2,140,000 308,000 332,000 24,000

Dollar sales$162,640,000 $23,408,000 $25,232,000 $1,824,000

Orders processed 76,800 8,400 7,820 (580)

Sales personnel per month 90 90 96 (6)

Advertising$42,000,000 $3,500,000 $3,528,000 $28,000U

Staff salaries 3,240,000 270,000 270,000

Sales salaries 2,700,000 225,000 240,200 15,200U

Commissions 6,505,600 936,320 1,009,280 72,960U

Per diem expense 4,698,000 391,500 420,400 28,900U

Office expenses 8,637,600 783,800 745,600 38,200F

Shipping expenses 14,508,000 1,987,000 2,094,000 107,000U

Total expenses$82,289,200 $8,093,620 $8,307,480 $213,860U

Fletcher called in the companys new controller, Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the companys reporting format might not be giving Fletcher a true picture of the companys operations. She proposed that SoftGro implement flexible budgeting. Porter offered to redo the Monthly Selling Expense Report for November using flexible budgeting so that Fletcher could compare the two reports and see the advantages of flexible budgeting.

Porter discovered the following information about the behavior of SoftGros selling expenses.

The total compensation paid to the sales force consists of a monthly base salary and a commission; the commission varies with sales dollars.

Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of office expense is $6,180,000 annually and is incurred uniformly throughout the year.

Subsequent to the adoption of the annual budget for the current year, SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report.

Per diem reimbursement to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. SoftGros original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month.

The companys shipping expense is a semivariable cost with the variable portion, $6.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year.

Required:

Why would Susan Porter propose that SoftGro use flexible budgeting in this situation?

Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoftGros control over selling expenses.