Play Time Toys is organized into two major divisions: marketing and production. The production division is further divided into three departments: puzzles, dolls, and video games. Each production department has its own manager.
The company’s management believes that all costs must be covered by sales of the three product lines. Therefore, a portion of headquarters, marketing, and production division costs are allocated to each product line. The company’s accountant prepared the following performance report for the manager of the dolls production department:
REQUIRED
A. Is Play Time using a static budget or a flexible budget to calculate variances? Explain. Do you agree with using this approach? Why or why not?
B. Develop an appropriate benchmark for evaluating the performance of the dolls production department. Decide whether to include or exclude each cost category and explain your decisions.
C. Use the benchmark you created in Part B to calculate variances.
D. Review the variances from Part C. Briefly describe the types of operating or budgeting problems that might have caused these variances.
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