MEG Associates is reeling from a decline in profits because of competition.   For its most recent year end, its controller has prepared following variance analysis and concluded that the company has done very well controlling its costs:

                                                                Budgeted                            Actual                                   Variance

Variable costs:

Professional Labour                        $1,000,000                           $ 940,000                             $60,000          F

Travel                                                       50,000                                  40,000                                    10,000            F

Supplies                                                 100,000                                90,000                                    10,000            F

Fixed Costs:

Professional Labour                          400,000                              405,000                                   (5,000)           U

Facilities Cost                                       250,000                              265,000                                  (15,000)         U

Insurance                                               80,000                                  78,000                                     2,000             F

Totals                                                    $1,880,000                           $1,818,000                          $ 62,000          F

For the year MEG Associates projected (budgeted) that it would generate $2,000,000 in revenues; it actually generated $1,800,000. In this case sales $ are the activity.  The company has consulted with you for help in understanding what is happening.  You decide to address the following items.

Required:

What is the major weakness in the report above and how do you recommend addressing it?

Recast the report (using a flexible budget instead of the static one presented) to enable a more meaningful way to enable cost control evaluation.

MEG Associates uses a management by exception philosophy.  Use the report you prepared in (b) above and explain which costs are likely to receive additional investigation.