1A3D RAINBOW INC. RECENTLY APPOINTED MARGARET JOYCE AS VICE PRESIDENT...

44. CSO: 1A3f LOS: 1A3d

Rainbow Inc. recently appointed Margaret Joyce as vice president of finance and asked

her to design a new budgeting system. Joyce has changed to a monthly budgeting system

by dividing the company’s annual budget by twelve. Joyce then prepared monthly

budgets for each department and asked the managers to submit monthly reports

comparing actual to budget. A sample monthly report for Department A is shown below.

Rainbow Inc.

Monthly Report for Department A

Actual Budget Variance

Units 1,000 900 100F

Variable production costs

Direct material $2,800 $2,700 $100U

Direct labor 4,800 4,500 300U

Variable factory overhead 4,250 4,050 200U

Fixed costs

Depreciation 3,000 2,700 300U

Taxes 1,000 900 100U

Insurance 1,500 1,350 150U

Administration 1,100 990 110U

Marketing 1,000 900 100U

Total costs $19,450 $18,090 $1,360U

This monthly budget has been imposed from the top and will create behavior problems.

All of the following are causes of such problems except

a. the use of a flexible budget rather than a fixed budget.

b. top management authoritarian attitude toward the budget process.

c. the inclusion of non-controllable costs such as depreciation.

d. the lack of consideration for factors such as seasonality.