EduSoft Corporations president, Mark Fletcher, was looking forward to seeing the performance reports for October because he

EduSoft Corporation’s president, Mark Fletcher, was looking forward to seeing the performance reports for October because he knew the company’s sales for the month had exceeded budget by a considerable margin. EduSoft, a distributor of educational software packages, had been growing steadily for approximately two years. Fletcher’s biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the October reports, he was dismayed to see the large unfavorable variance in the company’s Monthly Selling Expense Report that follows.

Fletcher called in the company’s new controller, Susan Porter, to discuss the implications of the variances reported for October and to plan a strategy for improving performance. Porter suggested that the company’s reporting format might not be giving Fletcher a true picture of the company’s operations. She proposed that EduSoft implement flexible budgeting. Porter offered to redo the Monthly Selling Expense Report for October using flexible budgeting so that Fletcher could compare the two reports and see the advantages of flexible budgeting.
Porter discovered the following information about the behavior of EduSoft’s selling expenses.
• The total compensation paid to the sales force consists of a monthly base salary and a commission; the commission varies with sales dollars.
• Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of office expense is $6,000,000 annually and is incurred uniformly throughout the year.
• Subsequent to the adoption of the annual budget for the current year, EduSoft decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective October 1. Porter decided that these additional six people should be recognized in her revised October report.
• Per diem reimbursement to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. The original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month.
• The company’s shipping expense is a semivariable cost with the variable portion, $6.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year.

Required:
1. Citing the benefits of flexible budgeting, explain why Susan Porter would propose that EduSoft use flexible budgeting in this situation.
2. Prepare a revised Monthly Selling Expense Report for October that would permit Mark Fletcher to more clearly evaluate EduSoft’s control over selling expenses. The report should have a line for each selling expense item showing the appropriate budgeted amount, the actual selling expense, and the monthly dollar variance.
(CMA,adapted)

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EDUSOFT CORPORATION Monthly Selling Expense Report For the Month of October October Variance S160,000,000 $22 400,000 $24,800,000 $2,400,000 30,000 700) October Budget Annual Budget Actual Dollar sales Unit sales Orders processed Sales personnel per mot.. 2,000,000 280,000 6,500 310,000 5,800 54,000 S 39,600,000 3,300,000 3,320,000 250,000 230,800 992,000 325,200 716,800 1,953,000 20,000 U 250,000 216,000 Staff salaries 3,000,000 2,592,000 6,400,000 3,564,000 8,160,000 13,500,000 S 76,816,000 14,800 U 96,000 U 28,200 U 43,200 F 148,000 U $7,524,000 7,787,800 263,800 U Sales salaries. Per diem expense Office expenses Shipping expenses Total expeises.... 297,000 1,805,000