Problem 11-39 Budgets and Performance Evaluation (LO 11-1, 11-6)

Johnson Electrical produces industrial ventilation fans. The company plans to manufacture 66,000 fans evenly over the next quarter at the following costs: direct material, $1,716,000; direct labor, $528,000; variable production overhead, $531,300; and fixed production overhead, $933,000. The $933,000 amount includes $72,000 of straight-line depreciation and $114,000 of supervisory salaries.

Shortly after the conclusion of the quarters first month, Johnson reported the following costs:

Direct material	$	527,900
Direct labor		164,500
Variable production overhead		184,000
Depreciation		24,000
Supervisory salaries		40,700
Other fixed production overhead		243,000
Total	$	1,184,100

Dave Kellerman and his crews turned out 20,000 fans during the montha remarkable feat given that the firms manufacturing plant was closed for several days because of storm damage and flooding. Kellerman was especially pleased with the fact that overall financial performance for the period was favorable when compared with the budget. His pleasure, however, was very short-lived, as Johnsons general manager issued a stern warning that performance must improve, and improve quickly, if Kellerman had any hopes of keeping his job.

Required:

Which of the two budgets would be more useful when planning the companys cash needs over a range of activity?

Prepare a performance report that compares static budget and actual costs for the period just ended (i.e., the report that Kellerman likely used when assessing his performance).

Prepare a performance report that compares flexible budget and actual costs for the period just ended (i.e., the report that the general manager likely used when assessing Kellermans performance).

5-a.Which of the following two reports is preferred?

5-b.Which of the following statements is false?

Prepare a performance report that compares static budget and actual costs for the period just ended (i.e., the report that Kellerman likely used when assessing his performance). (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Do not round intermediate calculations.)

	Static Budget:	Actual:
	22,000 Units	20,000 Units	Variance
Direct material used	$572,000	$527,900	$44,100	Favorable
Direct labor	176,000	164,500	11,500	Favorable
Variable production overhead	177,100	184,000	6,900	Unfavorable
Depreciation	24,000	24,000	0	None
Supervisory salaries	38,000	407,000	2,700	Unfavorable
Other fixed production overhead	249,000	243,000	6,000	Favorable
Total	$1,236,100	$1,550,400	$52,000	Favorable

Required 2

Required 4

Prepare a performance report that compares flexible budget and actual costs for the period just ended (i.e., the report that the general manager likely used when assessing Kellermans performance). (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Do not round intermediate calculations.)

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	Flexible Budget:	Actual:
	20,000 Units	20,000 Units	Variance
Direct material used	$527,900	$527,900
Direct labor		164,500
Variable production overhead		184,000
Depreciation		24,000
Supervisory salaries		40,700
Other fixed production overhead		243,000
Total	$527,900	$1,184,100

Which of the following two reports is preferred?

A performance report based on

flexible budgeting

which of the following statements is false?

	The general manager's warning is appropriate because of the sizable variances that have arisen.radio button unchecked1 of 3 With the static budget, performance appears favorable.radio button unchecked2 of 3 Kellerman's assessment regarding the favorable overall performance for the period is correct.radio button checked3 of 3