12

During the year, the sales manager, anticipating sales increases, requested the production
manager to step up production to 6000 units. As there are spare capacity to cope with the
increased production, production manager happily complied with the request.
However, the production manager was questioned by the Executive Director basing on the
following analysis:

Sales
Less:
Direct materials
Direct labour
Variable production overhead
Fixed production overhead
Fixed selling and admin. exp.
Net profit

Budget
$
50 000

Actual
$
60 000

Variance
$
10 000

10 000
6 000
2 500
3 000
15 000
36 500
13 500

11 800
7 000
2 900
3 000
15 000
39 700
20 300

1 800
1 000
400
3 200
6 800

(F)
(A)
(A)
(A)

(A)
(F)

Pointing at all the adverse variance, the executive director expressed disappointment over his
performance and made it clear that no salary increment will be offered to him next year.

Do you think that the production managers performance is fairly evaluated?

If yes, state the factors considered in the fair evaluation.
If no, how do you assess his performance?

13

Agogo manufacturing plcs performance report was as follows:

Performance report for the year ending 30 June 2014

Units produced
Variable costs:
Direct materials
Direct labour
Indirect materials
Indirect labour
Light & Heat
Fixed Costs:
Supervision
Rates
Insurance
Maintenance
Depreciation
Total manufacturing costs

Budget
25 000
$

Actual
20 000
$

Variance
5 000
$

125 000
300 000
12 500
18 750
31 250

110 000
260 000
11 400
16 200
24 600

15 000
40 000
1 100
2 550
6 650

F
F
F
F
F

60 500
8 700
5 200
4 700
15 300

61 400
8 700
5 300
4 450
15 300

900
0
100
250
0

581 900

517 350

64 550

The performance report above is based on a fixed/static budget.

REQUIRED:
a.

Should the production department manager be rewarded for the significantly large
favourable variance reported for the year?

b.

Prepare a flexible budget for the following levels of activities:

20 000 units; 25 000 units & 30 000 units.

c.

Prepare a flexible budget performance report.

A
F