Question

Activity Flexible Budgeting, Performance Report, Volume Variance

Novo, Inc., wants to develop an activity flexible budget for the activity of moving materials. Novo uses eight forklifts to move materials from receiving to stores. The forklifts are also used to move materials from stores to the production area. The forklifts are obtained through an operating lease that costs $18,000 per year per forklift. Novo employs 25 forklift operators who receive an average salary of $50,000 per year, including benefits. Each move requires the use of a crate. The crates are used to store the parts and are emptied only when used in production. Crates are disposed of after one cycle (two moves), where a cycle is defined as a move from receiving to stores to production. Each crate costs $1.80. Fuel for a forklift costs $3.60 per gallon. A gallon of gas is used every 20 moves. Forklifts can make three moves per hour and are available for 280 days per year, 24 hours per day (the remaining time is downtime for various reasons). Each operator works 40 hours per week and 50 weeks per year.

Required:

1. Prepare a flexible budget for the activity of moving materials, using the number of cycles as the activity driver. If required, round your answers to the nearest cent.

Novo, Inc. Flexible Budget
	Formula
Resource	Fixed	Variable
Salaries	$
Lease
Crates		$
Fuel
Total	$	$

2. Calculate the activity capacity for moving materials.
cycles

Suppose Novo works at 80 percent of activity capacity and incurs the following costs:

Salaries	$1,290,000
Leases	144,000
Crates	118,000
Fuel	24,000

Prepare the budget for the 80 percent level for the moving materials activity. If required, round your answers to the nearest cent.

Novo, Inc.
Budget for the 80 percent level
	Formula
Resource	Fixed	Variable	60,000 Cycles (Activity Output)
Salaries	$		$
Lease
Crates		$
Fuel
Total	$	$	$

Prepare a performance report for the moving materials activity. If an amount is zero, enter "0". Select "N/A" if there is no variance.

Novo, Inc.
Performance Report
For the Year 20XX
Resource	Actual Costs	Budgeted Costs	Budget Variance	Favorable (F) or Unfavorable (U)
Salaries	$	$	$	Unfavorable
Lease				N/A
Crates				Unfavorable
Fuel				Unfavorable
Total	$	$	$	Unfavorable

3. Calculate the amount of the volume variance for moving materials.
$

4. Suppose that a redesign of the plant layout reduces the demand for moving materials to one-third of the original capacity. What is the budgeted cost for this new activity level? When making your calculations, round the number of required operators and the number of required forklifts to the next higher number (for example, a computed value of 6.2 rounds to 7). If required, round your answers to the nearest cent.

Budgeted Cost for New Activity Level
	Formula
Resource	Fixed	Variable	25,000 Cycles (Activity Output)
Salaries	$		$
Lease
Crates		$
Fuel
Total	$	$	$

Feedback

The total budgeted cost is equal to the total variable costs budgeted for the activity level plus the total budgeted fixed costs.

Answer 1

Activity Flexible Budgeting, performance Reported,Volume variance

1. Number of moves per forklift = 3 x 24 x 280 = 20,160 moves

Total number of moves for 8 forklift = 20,160 x 8 = 161,280 moves

Total number of cycles at 100% forklift capacity = 161,280 / 2 = 80,640 cycles

But the activity capacity = 3 x 25 forklift operators x 40 hours x 50 weeks = 150,000 moves or 150,000 /2 = 75,000 cycles

Formula: Total cost of moving materials = 1,394,000 + 2.16 q, where q is the number of cycles

Novo Inc.

Flexible Budget:

	Fixed	Variable
	$	$
Crates ( 75,000 x $ 1.80 )		135,000
Fuel (75,000 / 10 x $ 3.60)		27,000
Lease ( 8 x $ 18,000)	144,000
Salaries ( 25 x $ 50,000)	1,250,000
Total	1,394,000	162,000

2. Forklift capacity : 80,640 cycles

Actual activity capacity : 75,000 cycles.

Novo Inc.

Flexible Budget ( 80% capacity)

Activity level = 75,000 x 80% = 60,000 cycles

	Fixed	Variable
	$	$
Crates ( 60,000 x $ 1.80)		108,000
Fuel ( 60,000 x $ 0.36)		21,600
Lease	144,000
Salaries	1,250,000
Total	1,394,000	129,600

Flexible Budget Performane Report:

	Actual	Flexible Budget	Spending Variance
	$	$	$
Crates	118,000	108,000	10,000 U
Fuel	24,000	21,600	2,400 U
Lease	144,000	144,000	None
Salaries	1,290,000	1,250,000	40,000 U
Total	1,576,000	1,523,600	52,400 U

3. Volume variance is the capacity cost = 1,250,000 + 144,000 = $1,394,000

4. Capacity is now reduced to 75,000 / 3 = 25,000 cycles.

Capacity per operator = (2,000 hours x 3 moves) / 2 = 3,000 cycles

Hence, the number of operators needed = 25,000 / 3,000 = 8.33 or 9 operators.

Capacity per forklift = ( 3 moves x 24 hours x 280 days) / 2 = 10,080 cycles

Number of forklifts needed = 25,000 / 10,080 = 2.48 or 3

Number of forklifts needed : 3

Budgeted Costs for new activity level:

	Fixed	Variable	25,000 cycles
	$	$	$
Crates		1.80	45,000
Fuel		0.36	9,000
Lease ( 3 x $ 18,000)	54,000		54,000
Salaries ( 9 x $ 50,000)	450,000		450,000
Total	$ 504,000	$ 2.16	558,000