Question

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	$310,000
Utilities	17,000
Depreciation	28,000
Total	$355,000

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	$334,000		71,000
February	316,000		64,000
March	303,000		58,000

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 355,000. 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	$20
Utility cost per direct labor hour	$1.1
Direct labor hours per unit	0.2
Planned monthly unit production	77,000

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	71,000	64,000	58,000
?	$	$	$
?
?
Total	$	$	$
Supporting calculations:
Units of production	71,000	64,000	58,000
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	$	$	$

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	$	$	$

c. What does this comparison suggest?

The Machining Department has performed better than originally thought. Yes or No
The department is spending more than would be expected. Yes or No

Answer 1

a)

Flexible budget for January, February and March in machining department;

Niland Company Machining department budget for the three months ending

March 31

Particulars	January	February	March
Units of production	71000	64000	58000
1Wages	$ 284000	$ 256000	$ 232000
2 Utilities	$ 15620	$ 14080	$ 12760
3 Depreciation	$ 28000	$ 28000	$ 28000
Total	$ 327620	$ 298080	$ 272760

1)

Budgeted direct labor hours per unit = 0.2 hour

Wages per hour = $ 20

Flexible budget cost of wages for each month;

= Actual production * Standard hours of wages required * Standard rate

For January = 71000 units * 0.2 hour * $20 = $ 284000

For February = 64000 units * 0.2 * 20 = $ 256000

For March= 58000 * 0.2 * 20= $ 232000

2)

Budgeted direct labor hours per unit = 0.2 hour

Budgeted utility cost per direct labor hour = $ 1.1 per hour

Flexible budget cost of utilities for each month;

= Actual production * Standard hours of wages required * Standard rate

For January = 71000 units * $0.2 per unit * $ 1.1 = $ 15620

For February = 64000 units * $ 0.2 per unit * $ 1.1 = $ 14080

For March = 58000 units * $ 0.2 per unit * $ 1.1   = $ 12760

3)

Assuming that depreciation is a fixed cost. Fixed costs are constant for a relevant range of activity. Nothing is mentioned in the question regarding the change in relevant range. So depreciation cost will be same for all levels of activity.

b)

Comparison of flexible budget with actual expenditures

Particulars	January	February	March
Total Flexible budget cost	$ 327620	$ 298080	$ 272760
Actual cost	$ 334000	$ 316000	$ 303000
Excess of actual cost over budgeted	$ 6380	$ 17920	$ 30240

c)

This comparison suggests that the machining department is spending more than would be expected. And the machining department is performed worse than originally thought. Because actual cost incurred on every month is exceeding the budgeted cost for actual production (flexible budget cost).