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11 February, 22:58

Sheffield Corp. prepared a 2019 budget for 105000 units of product. Actual production in 2019 was 115000 units. To be most useful, what amounts should a performance report for this company compare? The actual results for 115000 units with a new budget for 115000 units. The actual results for 115000 units with last year's actual results for 118500 units. It doesn't matter. All of these choices are equally useful. The actual results for 115000 units with the original budget for 105000 units.

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  1. 12 February, 00:01
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    The actual results for 115000 units with a new budget for 115000 units.

    Explanation:

    In order to evaluate Sheffield's performance, you have to evaluate the actual production costs of producing 115,000 units compared to a new production budget for the same 115,000 units.

    Budgets are stated in dollars, so if you compare this production level to a smaller production level then you might conclude that there was an unfavorable variance because more money than expected was spent, without considering that the total production had creased. If you compare this actual production to a budget for a larger production you might conclude that you underspent (had a favorable variance) without considering the fewer units produced.
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