The case focuses on Prudhom Enterprises Inc. and the flexible budget of the company’s manufacturing facility in Wichita. The controller Tom Kemper creates a preliminary annual cost control report which should be sent to the corporate headquarters after the beginning of the New Year. However, the general manager Melissa Ilianovitch tries to convince Kemper to avoid making further adjustments to the report because they can negatively impact the facility’s and the manager’s performance evaluations. The case illustrates how people can misunderstand the point of flexible budgets and mistakenly associate their outcomes with performance analysis.
Next, in the case of the Wichita facility of Prudhom Enterprises, the increased proportion of unfavorable variances identifies that the company used wrong or low-quality data to create a flexible budget. For example, the unfavorable variance in funds spent on supplies (6,000) points to the company’s low awareness of the supply market (Garrison et al., 2014). Furthermore, the company’s dependence on the equipment, its maintenance, and suitable materials, such as the machinery’s lubricant, reduces the proportion of controllable budget variances.
Therefore, the prevalence of unfavorable variances in the annual cost report cannot point to the negative performance of the facility. In fact, the amount of labor hours in the flexible report matches the data from actual results (18,000) (Garrison et al., 2014). Thus, Ilianovitch’s concern about the proportion of unfavorable variances is based on the erroneous assumption that unfavorable variances equal low performance.
Therefore, in this case, Kemper has two possible options for further action. Firstly, Kemper can make the necessary corrections to the report in hopes that the corporate management will understand the uncontrollable nature of unfavorable variances. On the other hand, Kemper can support Ilianovitch’s decision and leave the report unchanged. However, this action will significantly distort the data for corporate management and can potentially result in uninformed decision-making.
In conclusion, Kempner should make the necessary changes in the report to draw the management’s attention to the facility’s dependence on equipment and maintenance. Moreover, Ilianovitch’s request to leave the report unchanged is based on her personal motives. The proportion of unfavorable variances in the report gives the company the opportunity to work on mistakes and improve its performance by reducing the dependence of production on third-party services. In the future, the company should use high-quality data to create flexible budgets to eliminate unfavorable variances.
Reference
Garrison, R. H., Noreen, E., & Brewer, P. C. (2014). Managerial accounting (15th ed.). McGraw-Hill Education.