P11.37 Flexible budget; performance report; activity-based flexible budget: software distributor LO11.3 Mark Fletcher, managing director of SoftGro Ltd, was looking forward to seeing the performance reports for 11.10 November because he knew the company's 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. Fletcher's biggest challenge at this point was to ensure that the company did not lose control over costs during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavourable variance in the company's monthly selling expense report.SoftGro Lid Monthly selling expense report November Annual November November November budget budget actual variance Unit sales 2 000 000 280 000 310 000 30 000 Dollar sales $160 000 000 $22 400 000 $24 800 000 $2 400 000 Orders processed 54 000 6 500 $ 8OO (700) Sales personnel per month 90 90 96 (6) Advertising $ 39 600 000 $ 3 300 000 $ 3 320 000 $ 20 000 U Staff salaries 3000 000 250 000 250 000 Sales salaries 2 592 000 216 000 230 800 14 800 U Commissions 6 400 000 896 000 992 000 96 000 Daily travel allowance 3 564 000 297 000 325 200 28 200 Office expenses 8 160 000 760 000 716 800 43 200 Shipping expenses 13 500 000 1 805 000 1953 000 148 000 Total expenses $ 76 816 000 5 7 524 000 $ 7 787 HOO 263 800 Fletcher called in the company's new accountant, Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the reporting format the company had been using might not be giving Fletcher a true picture of its 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 behaviour of SoftGro's 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 $6 000 000 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 I November. Porter decided that these additional six people should be recognised in her revised budget The payment of the daily travel allowance to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent travelling. SoftGro's original budget was based on an average sales force of 90 people throughout the year, with each salesperson travelling 15 days per month. The company's shipping expense is a semivariable cost with the variable portion, $6 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year. Required: 1. Prepare a revised monthly selling expense report for November that would permit Mark Fletcher to evaluate more accurately SoftGro's control over selling expenses. The report should have a line for each selling expense item, showing the appropriate budgeted amount, the actual selling expense and the monthly dollar variance. 2. Explain the advantages and disadvantages for SoftGro of adopting an activity-based flexible budget