Question

Ratchet Company uses budgets in controlling costs. The August 2020 budget report for the company’s Assembling Department is as follows.

RATCHET COMPANY Budget Report Assembling Department For the Month Ended August 31, 2020
			Difference
Manufacturing Costs	Budget	Actual	Favorable Unfavorable Neither Favorable nor Unfavorable
Variable costs
Direct materials	$53,760	$52,760	$1,000	Favorable
Direct labor	61,440	58,340	3,100	Favorable
Indirect materials	25,600	25,700	100	Unfavorable
Indirect labor	19,200	18,730	470	Favorable
Utilities	22,400	22,240	160	Favorable
Maintenance	7,680	7,940	260	Unfavorable
Total variable	190,080	185,710	4,370	Favorable
Fixed costs
Rent	10,500	10,500	–0–	Neither Favorable nor Unfavorable
Supervision	16,100	16,100	–0–	Neither Favorable nor Unfavorable
Depreciation	5,400	5,400	–0–	Neither Favorable nor Unfavorable
Total fixed	32,000	32,000	–0–	Neither Favorable nor Unfavorable
Total costs	$222,080	$217,710	$4,370	Favorable

The monthly budget amounts in the report were based on an expected production of 64,000 units per month or 768,000 units per year. The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August because only 62,000 units were produced.

State the total monthly budgeted cost formula. Prepare a budget report for August using flexible budget data. In September, 68,000 units were produced. Prepare the budget report using flexible budget data, assuming (1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in September as in August

Answer 1

	Variable cost per unit = 176290/61000
			2.89
a)	the Formula is
	$32,000	+	variable cost of	$2.97	per unit
b)			Flexible budget
				Budget	Actual	Difference
	Activity level		62,000	62000
	Variable costs
	Direct materials	0.84	52080	52,760	680	U
	direct labor	0.96	59520	58,340	1,180	F
	indirect materials	0.4	24800	25,700	900	U
	indirect labor	0.3	18600	18,730	130	U
	Utilities		0.35	21700	22,240	540	U
	Maintenance	0.12	7440	7,940	500	U
	total variable costs	2.97	184140	185,710	1,570	U
	Fixed cost
	Rent			10,500	10,500	0	N
	supervision		16,100	16,100	0	N
	Depreciation		5,400	5,400	0	N
	total fixed cost		32,000	32,000	0	N
	total cost			216,140	217,710	1,570	U
c)			Flexible budget
				Budget	Actual	Difference
	Activity level		68,000	68000
	Variable costs
	Direct materials	0.84	57120	58,036	916	U
	direct labor	0.96	65280	64,174	1,106	F
	indirect materials	0.4	27200	28,270	1,070	U
	indirect labor	0.3	20400	20,603	203	U
	Utilities		0.35	23800	24,464	664	U
	Maintenance	0.12	8160	8,734	574	U
	total variable costs	2.97	201960	204,281	2,321	U
	Fixed cost
	Rent			10,500	10,500	0	N
	supervision		16,100	16,100	0	N
	Depreciation		5,400	5,400	0	N
	total fixed cost		32,000	32,000	0	N
	total cost			233,960	236,281	2,321	U