Question

Activity-Based Flexible Budgeting

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 $60,000 per year (A total of 9,000 welding hours are supplied by the six workers.)

• Welding supplies: $300 per job

• Welding hours: 3 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: $378,000

• Parts and supplies: $804,000

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	$	$	$
Variable cost

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. The flexible budget formula is as follows-
Total Budgeted OHs = Budgeted Fixed OHs ($) + (Budgeted Variable OHs per activity ($) X Total Activity Units)

Here our budgeted Fixed OHs are - 4units x $15,000 per unit = $60,000

Since welding hours are the cost drivers, we will derive the Variable OHs rate using total budgeted welding hours.

Total welding hours = 9,000 hours
Total budgeted salary cost = $60,000 X 6 = $360,000
Activity Rate = $360,000/9,000hrs = $40/hr

Hours per welding job = 3hrs
Hence total budgeted welding jobs = 9,000hrs/ 3hrs per job= 3,000 jobs
Welding supplies cost per job= $300
Hence total budgeted welding supplies cost = $300 * 3,000 = $900,000
Activity Rate = $900,000/9,000 hrs = $100/hr

Total Variable cost rate= $140/hr

Hence flexible budget formula =
Welding Cost = $60,000 + ($140/hr x Total Welding Hours)

2.

Activity Based Performance Report

Activity	Actual Cost	Budgeted Cost (90%)	Budget Variance	Variance
Welding	$60,000 + $378,000 + $ 804,000 = $1,242,000	$60,000 + ($140/hr * 9,000 hrs) = $1,320,000	$78,000	F
Fixed Cost	$60,000	$60,000	-	NA
Variable Cost	$378,000 + $ 804,000 = $1,182,000	$140/hr * 9,000 hrs= $1,260,000	$78,000	F

3. Welding Cost = $60,000 + ($130/hr x Total Welding Hours) {Since workers cost will be $30/hr instead of $40/hr]