Verification of actual costs: a Total actual costs b Identifying the common error Budgeted costs at normal capacity Analysis Standard costs for actual production:
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
I could use some help with (a) through (c) (at the bottom) on this.
Porter Corporation has just hired Bill Harlow as its new controller. Although Harlow has had little formal accounting training, he professes to be highly experiences, having learned accounting "the hard way" in the field. At the end of his first month's work, Harlow prepared the following performance report:
| Total Actual Costs | Total Budgeted Costs | Variances | |
| Direct materials | $216,630 | $237,600 | $20,970 F |
| Direct labor | 119,340 | 132,000 | 12,660 F |
| Variable overhead | 63,000 | 66,000 | 3,000 |
| Fixed overhead | 184,000 | 184,000 | |
| $582,970 | $619,600 | $36,630 F |
In his presentation at Porter's month-end management meeting, Harlow indicated that things were going "fantastically." "The figures indicate," he said, "that the firm is beating its budget in all cost categories." This good news made everyone at the meeting happy and furthered Harlow's acceptance as a member of the management team.
After the management meeting, Susan Jones, Porter's general manager, asked you, as an independent consultant, to review Harlow's report. Jones' concern stemmed from the fact that Porter has never operated as favorably as Harlow's report seems to imply, and she cannot explain the apparent significant improvement.
While review Harlow's report, you are provided the following cost and operating data for June: Porter has a monthly normal capacity of 11,000 direct labor hours or 8,800 units of product.
After reviewing Porter's June cost data, you tell Harlow that his cost report contains a classic budgeting error, and you explain how he can remedy it. In response to your suggestion, Harlow revises his report as follows:
| Total Actual Costs | Total Budgeted Costs | Variances | |
| Direct materials | $216,630 | $216,000 | $630 U |
| Direct labor | 119,340 | 120,000 | 660 F |
| Variable overhead | 63,000 | 60,000 | 3,000 U |
| Fixed overhead | 184,000 | 184,000 | |
| $582,970 | $580,000 | $2,970 U |
Harlow's revised report is accompanied by remarks expressing regret at the oversight in the original report.
Required
In your role as consultant,
a) Verify that Harlow's actual cost figures are correct
b) Identify and explain the classic budgeting error that Harlow apparently incorporated into his original cost report.
c) Explain why Harlow's revised figures could be considered deficient
d) Further analyze Harlow's revised variances, isolating underlying potential causal factors. How do your analyses indicate bases for concern to management?
See the spreadsheet below. I will tackle (d) on another question.
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