Star Company, a wholly owned subsidiary of Orbit Inc., produces and sells three main product lines. The company employs a standard cost accounting system for record-keeping purposes.
At the beginning of the year, the president of Star Company presented the budget to the parent company and accepted a commitment to contribute $15,800 to Orbit's consolidated profit in 20A. The president has been confident that the year's profit would exceed the budget target, because the monthly sales reports have shown that sales for the year will exceed the budget by 10%. The president is both disturbed and confused when the controller presents an adjusted forecast as of November 30, indicating that profit will be 11% under budget. The two forecasts follow:

There have been no sales price changes or product mix shifts since the January 1 forecast. The only cost variance on the income statement is under applied factory overhead. This arose because the company used only 16,000 standard machine hours (budgeted machine hours were 20,000) during the year as a result of a shortage of raw materials. Fortunately, Star Company's finished goods inventory was large enough to fill all sales orders received.
Required:
(1) Analyze and explain the forecast profit decline, in spite of increased sales and good cost control.
(2) Explain and illustrate an alternative internal cost reporting procedure that would avoid the confusing effect of the procedure used presently.

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Forecasts as of January 1 November 30 Sales Cost of goods sold at standard Gross profit at standard.. Less underapplied factory overhead Gross profit at actual $268,000 $294,800 212000 233,200 S 56,000 61,600 6,000 56,000 55,600 $13,400 14,740 26,800 26,800 40,200 S41,540 $15,800 14,060 Administrative expense Total commercial expense.... Includes fixed factory overhead of $30,000.