Question

Static Budget versus Flexible Budget The production supervisor of the Machining Department for Niland Company agreed to the following monthly static budget for the upcoming year: Niland Company Machining Department Monthly Production Budget Wages $658,000 Utilities 34,000 Depreciation 57,000 Total $749,000 The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows: Amount Spent Units Produced January $706,000 115,000 February 669,000 104,000 March 640,000 94,000 The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been significantly less than the monthly static budget of 749,000. However, the plant manager believes that the budget should not remain fixed for every month but should “flex” or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows: Wages per hour $21 Utility cost per direct labor hour $1.1 Direct labor hours per unit 0.25 Planned monthly unit production 125,000 a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume depreciation is a fixed cost. If required, use per unit amounts carried out to two decimal places. Niland Company Machining Department Budget For the Three Months Ending March 31 January February March Units of production 115,000 104,000 94,000 $ $ $ Total $ $ $ Supporting calculations: Units of production 115,000 104,000 94,000 Hours per unit x x x Total hours of production Wages per hour x $ x $ x $ Total wages $ $ $ Total hours of production Utility costs per hour x $ x $ x $ Total utilities $ $ $ Feedback For each level of production, show wages, utilities, and depreciation. Learning Objective 2, Learning Objective 4. b. Compare the flexible budget with the actual expenditures for the first three months. January February March Total flexible budget $ $ $ Actual cost Excess of actual cost over budget $ $ $ What does this comparison suggest? The Machining Department has performed better than originally thought. No The department is spending more than would be expected. Yes

Answer 1

Solution

Niland Company

1. Flexible Budget for the actual units produced –

	Niland Company
	Flexible Budget
	January	February	March
Units of Production	115,000	104,000	94,000
Wages	$603,750	$546,000	$493,500
Utilities	$31,625	$28,600	$25,850
Depreciation	$57,000	$57,000	$57,000
Total	$692,375	$631,600	$576,350
Supporting Calculation
units of production	115,000	104,000	94,000
hours per unit	0.25	0.25	0.25
Total hours of production	28,750	26,000	23,500
Wages per hour	$21	$21	$21
Total wages	$603,750	$546,000	$493,500
Total hours of production	28,750	26,000	23,500
utility cost per hour	$1.10	$1.10	$1.10
Utilities	$31,625	$28,600	$25,850

Note: Depreciation is fixed in nature and hence remains constant at $57,000 per month.

2. Comparison of flexible budget with actual expenditure for the first three months:

	Niland Company
	Comparison of Actual with Flexible
	January	February	March
Total flexible budget costs	$692,375	$631,600	$576,350
Actual costs	$706,000	$669,000	$640,000
Excess of actual cost over flexible budget	($13,625)	($37,400)	($63,650)

3. No, the Machining Department is spending more than it would be expected.