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.
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