1. MEG 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:

Budgeted Actual Variance

Variable costs:

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

Travel 50,000 40,000 10,000 F

Supplies 100,000 90,000 10,000 F

Fixed Costs:

Professional Labour 400,000 405,000 (5,000) U

Facilities Cost 250,000 265,000 (15,000) U

Insurance 80,000 78,000 2,000 F

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

For the year MEG Associates projected (budgeted) that it would generate $2,000,000 in revenues; it actually generated $1,800,000. In this case sales $ are the activity. The company has consulted with you for help in understanding what is happening. You decide to address the following items.

Required:

What is the major weakness in the report above and how do you recommend addressing it? (3 marks)

Recast the report (using a flexible budget instead of the static one presented) to enable a more meaningful way to enable cost control evaluation. (5 marks)

MEG 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. (4 marks)