Question

Static Budget versus Flexible Budget The production supervisor of the Machining Department for Hagerstown Company agreed to the following monthly static budget for the upcoming year: Hagerstown Company Machining Department Monthly Production Budget Wages $426,000 Utilities 35,000 Depreciation 58,000 Total $519,000 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 May $490,000 122,000 June 469,000 111,000 July 448,000 100,000 The Machining Department supervisor has been very pleased with this performance because actual expenditures for May–July have been significantly less than the monthly static budget of 519,000. 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 $16.00 Utility cost per direct labor hour $1.30 Direct labor hours per unit 0.20 Planned monthly unit production 133,000 a. Prepare a flexible budget for the actual units produced for May, June, and July in the Machining Department. Assume depreciation is a fixed cost. If required, use per unit amounts carried out to two decimal places. Hagerstown Company Machining Department Budget For the Three Months Ending July 31 May June July Units of production 122,000 111,000 100,000 Wages $ $ $ Utilities Depreciation Total $ $ $ Supporting calculations: Units of production 122,000 111,000 100,000 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. b. Compare the flexible budget with the actual expenditures for the first three months. May June July 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

a.

Hagerstown Company
Machining Department Budget
For the Three Months Ending July 31
	May	June	July
Units of production	122000	111000	100000
Wages	390400	355200	320000
Utilities	31720	28860	26000
Depreciation	58000	58000	58000
Total $	480120	442060	404000
Supporting calculations:
Units of production	122000	111000	100000
Hours per unit	0.20	0.20	0.20
Total hours of production	24400	22200	20000
Wages per hour	16	16	16
Total wages $	390400	355200	320000
Total hours of production	24400	22200	20000
Utility costs per hour	1.30	1.30	1.30
Total utilities $	31720	28860	26000

b.

	May	June	July
Total flexible budget	480120	442060	404000
Actual cost	490000	469000	448000
Excess of actual cost over budget	9880	26940	44000

The Machining Department has performed better than originally thought: NO

The department is spending more than would be expected: YES