Question

Foy Company has a welding activity and wants to develop a flexible budget formula for the activity. The following resources are used by the activity:

• Four welding units, with a lease cost of $15,000 per year per unit

• Six welding employees each paid a salary of $58,000 per year (A total of 12,000 welding hours are supplied by the six workers.)

• Welding supplies: $400 per job

• Welding hours: 4 hours used per job

During the year, the activity operated at 90 percent of capacity and incurred the following actual activity and resource costs.

• Lease cost: $60,000

• Salaries: $365,400

• Parts and supplies: $1,074,200

Required:

1. Prepare a flexible budget formula for the welding activity using welding hours as the driver.

Welding cost

=

$______

+

$______ X

2. Prepare a performance report for the welding activity. In the last column of Foy Company Activity-Based Performance Report, if variance amount is unfavorable select "U" , select "F", if it is Favorable and select "NA" if there is no variance.

Foy Company
Activity-Based Performance Report
Activity	Actual Cost	Budgeted Cost (90% level)	Budget Variance	Variance
Welding:	--	--	--	--
Fixed cost	$ ______	$ ______	$ ______	F/U/NA
Variable cost	______	______	______	F/U/NA

3. What if welders were hired through outsourcing and paid $30 per hour (the welding equipment is provided by Foy)? Repeat Requirement 1 for the outsourcing case.

Welding cost

=

$______

+

$______ X

Answer 1

1	Flexible budget formula,
	Welding cost=Fixed costs+Variable costs per welding hour*X
	Fixed costs:
				$
	Lease costs		(15000*4)	60000
	Salaries		(6*58000)	348000
	Total			408000
	Variable costs:
			$
	Parts and supplies		400	per job
	Variable costs per welding hour=Variable costs per job/Weldong hours used in a job=400/4=$ 100
	Flexible budget formula,
	Welding cost=408000+100 X
2	Budgeted welding hours at 90% level=12000*90%=10800 hours
	Budgeted variable Welding cost=100*10800=1080000
			Foy Company
		Activity-Based Performance Report
	Activity			Actual cost	Budgeted Cost (90% level)	Budget Variance	Variance
	Welding:
	Fixed cost			425400	408000	17400	U
				(60000+365400)
	Variable cost			1074200	1080000	5800	F
	If Budgeted cost > Actual cost,variance is favorable.Otherwise unfavorable.
3	Flexible budget formula,
	Welding cost=Fixed costs+Variable costs per welding hour*X
	Fixed costs:
				$
	Lease costs		(15000*4)	60000
	Total			60000
	Variable costs per welding hour
			$
	Salaries		30
	Parts and supplies		100
	Total		130
	Flexible budget formula,
	Welding cost=60000+130 X