Ferguson & Son Manufacturing

2094 Words9 Pages
Justin Girouard
Managerial Accounting

Module 6 Assignment 2

Ferguson & Son Manufacturing company is attempting to increase efficiency and reduce cost by introducing monthly performance reports for each department. Robert Ferguson Jr is trying to introduce this new type of accounting system and when you try something like this you will always run into some problems, but Robert is creating a culture of resentment.

Robert Ferguson is using a static planning budget to analyze the performance of each department. Garrison, Noreen & Brewer (2012) define a planning budget as a budget “prepared before the period begins and is valid for only the planned level of activity (p.385)” Robert is using a budgeted level of activity and
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Ferguson & Son Manufacturing should adapt a flexible budget system to improve efficiency. Garrison, Noreen & Brewer (2012) define a flexible budget as “an estimate of what revenues and costs should have been, given the actual level of activity for the period(p.385).” Garrison, Noreen & Brewer (2012) go on to say that “when a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget (p.385).” The activity level will change each period, through out the period as the business activity increases and decreases. Emory says, “those reports don 't tell the whole story. We always seem to be interrupting the big jobs for all those small rush orders. All that set up and machine adjustment time is killing us.” This is an example of the type of activity that is going to happen and needs to be taken into consideration when one is evaluating efficiency. The flexible budget will take into consideration this activity and compare the costs to the same level of activity. The current planned budget does not take this into consideration and these are issues that the supervisor has no power over. With the knowledge from the flexible budget, Robert Ferguson Jr may decide that if they purchase a new machine they could complete these rush orders, not have any idle time and in result increase efficiency. In the flexible budget system,

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