Case

Case

LETA Learning Systems specializes in education and training. One

responsibility center in the Professional Seminar Division is
Government Contract Seminars. It is treated as a profit center for
performance evaluation purposes.
Because the Department of Defense is downsizing, many companies
are cutting back and sending people to fewer seminars. Actual
Results and variances for the last fiscal year for Government Contract
Seminars are as follows:
Case
  Actual Fav. (Unfav.) Budget
Seminar Participants 7,020.00 1,380.00
Number of Seminars Given 175.00 25.00
     
Revenue 1,404,000.00 (396,000.00)
Variable Cost    
Participants    
Food 70,200.00 10,800.00
Workbooks and Handouts 274,890.00 85,100.00
Seminar    
Instructor’s Fees    
Rental of Sites 280,000.00 40,000.00
Equipment Rental 21,600.00 (2,630.00)
8,110.00 (510.00)
Fixed Costs of Government Contract    
Seminars    
- Salaries of Managers and Assistants 124,000.00 (4,000.00)
- Office Expenses    
- Promotion of Seminars 13,000.00 (640.00)
89,000.00 7,500.00
Divisional Overhead Allocated 389,000.00 9,000.00
     
Total Expenses 1,269,800.00 144,630.00
Net Income 134,200.00 (251,370.00)
Case

Seminars are for one, two, and three days. The budget expected the
average class days per seminar to be 2.5 days; the actual average
was 2 days. The manager’s salary included above is USD 60,000 and
was budgeted at that level.
  Actual Fav. (Unfav.) Budget Budget
Seminar Participants 7,020.00 1,380.00 8,400.00
Number of Seminars Given 175.00 25.00 200.00
       
Revenue 1,404,000.00 (396,000.00) 1,008,000.00
Variable Cost      
Participants      
Food 70,200.00 10,800.00 81,000.00
Workbooks and Handouts 274,890.00 85,100.00 360,000.000
Seminar         
Instructor’s Fees 280,000.00 40,000.00 320,000.00
Rental of Sites 21,600.00 (2,630.00) 18,970.00
Equipment Rental 8,110.00 (510.00) 7,600.00
Total Variable Cost 654,800.00 132,770.00 785,570.00
Contribution Margin 749,200.00 (263,230.00) 1,012,430.00
Fixed Costs of Government Contract Seminars         
- Salaries of Managers and Assistants 124,000.00 (4,000.00) 120,000.00
- Office Expenses 13,000.00 (640.00) 12,360.00
- Promotion of Seminars 89,000.00 7,500.00 95,500.00
 
Total Fixed Cost 226,000.00 2,860.00 96,500.00
Profit Before Allocated Cost 523,200.00 2,860.00 783,570.00
Divisional Overhead Allocated 389,000.00 9,000.00 398,000.00
       
Total Expenses 1,269,800.00 144,630.00 1,414,430.00
Net Income 134,200.00 (251,370.00) 38,570.00
Requirements
Requirements

1. Since government contract seminars is a profit center, the presumption

is that the manager controls revenues. The factors influencing revenues
are the number of seminar participants and the length of seminars. Does
the manager really control these factors? Explain.
2. In general, are the variances in this report controllable by the manager
of the profit center? Which costs and related variances are not
controllable by the manager?
3. Suggest improvements in the report. Prepare a performance report
which you believe better describes the manager’s performance than the
preceding report.
Since government contract seminars is a profit center, the presumption is that the manager controls
revenues. The factors influencing revenues are the number of seminar participants and the length of
seminars. Does the manager really control these factors? Explain.

Answer:
Since Government Contract Seminars is a Profit Center, the manager has
control on both expenses and revenues. The manager of the Government
Contract Seminar can either adjust the seminar fee in order to earn a profit
or he/she can lower the cost of the variable expenses to earn a reasonable
profit. The manager however doesn’t have direct control over the number of
seminar participants. They can influence the revenue by manipulating the
price and cost.
In general, are the variances in this report controllable by the manager of the profit center?
Which costs and related variances are not controllable by the manager?

Answer:
Most of the variances are controllable by the manager as these came from
subtracting the actual from the budget. However, not all costs and related
variances are controllable by the manager in the table.
The Manager has no control over items that are fixed whether the segment
controlled by the manager exists or not. In short, these costs are charged from the
company as whole not from the “Government Contract Seminar” segment. These
fixed costs are office expenses and promotion of seminars.
Divisional overhead allocated cannot be also controlled by the manager since it is
allocated by the whole company.
Suggest improvements in the report. Prepare a performance report which you believe
better describes the manager’s performance than the preceding report.

Suggestion:

Since it is stated that the figures given in the problem are for
Government and Contract Seminars segment, items that are not
charged from the segment must be separated.
 Performance Report

  Actual Budget Variance Variance (%)

Revenue 1,404,000.00 1,008,000.00 (396,000.00) -39.28%
Variable Cost        
Participants        
Food 70,200.00 81,000.00 10,800.00 13.33%
Workbooks and Handouts 274,890.00 360,000.000 85,100.00 16.14%
Seminar        
Instructor’s Fees        
Rental of Sites 280,000.00 320,000.00 40,000.00 12.50%
Equipment Rental 21,600.00 18,970.00 (2,630.00) -13.86%
8,110.00 7,600.00 (510.00) -6.71%

Total Variable Cost 654,800.00 785,570.00 132,770.00 16.90%

Contribution Margin 749,200.00 1,012,430.00 (263,230.00) -25.99%
Fixed Costs of Government Contract        
Seminars       -3.33%
- Salaries of Managers and Assistants 124,000.00 120,000.00 (4,000.00)
Total Fixed Cost 124,000.00 120,000.00 (4,000.00) -3.33%
         
Segment Margin 625,200.00 892,430.00 (267,230.00) -29.94%

Variance (%) = Variance / Budget

In the Performance Evaluation Report, the actual contribution
margin and segment profit are less than the budgeted. This means
that the manager did not do well enough to generate segment’s
profit because the higher the contribution margin and profit, the
better. That would be a favorable variance. When contribution
margin and profit are less than budgeted, it is unfavorable.