Question

Ratchet Company uses budgets in controlling costs. The August 2020 budget report for the company’s Assembling Department is as follows.

RATCHET COMPANY Budget Report Assembling Department For the Month Ended August 31, 2020
			Difference
Manufacturing Costs	Budget	Actual	Favorable Unfavorable Neither Favorable nor Unfavorable
Variable costs
Direct materials	$50,740	$49,740	$1,000	Favorable
Direct labor	54,280	51,480	2,800	Favorable
Indirect materials	25,960	26,260	300	Unfavorable
Indirect labor	22,420	21,940	480	Favorable
Utilities	14,750	14,580	170	Favorable
Maintenance	5,900	6,120	220	Unfavorable
Total variable	174,050	170,120	3,930	Favorable
Fixed costs
Rent	10,000	10,000	–0–	Neither Favorable nor Unfavorable
Supervision	18,200	18,200	–0–	Neither Favorable nor Unfavorable
Depreciation	5,200	5,200	–0–	Neither Favorable nor Unfavorable
Total fixed	33,400	33,400	–0–	Neither Favorable nor Unfavorable
Total costs	$207,450	$203,520	$3,930	Favorable

The monthly budget amounts in the report were based on an expected production of 59,000 units per month or 708,000 units per year. The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August because only 57,000 units were produced.

(a) State the total monthly budgeted cost formula.

(b) Prepare a budget report for August using flexible budget data.

(c) In September, 63,000 units were produced. Prepare the budget report using flexible budget data, assuming (1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in September as in August.

Answer 1

Answer a:

$ 2.95x + 33,400

Explanation:

Budgeted cost formula = [Variable cost per unit * units] + Fixed cost

= [174,050 / 59,000] * 'x' + 33,400

= $ 2.95x + 33,400

Answer b:

	Budget	Actual	Difference
Units	57,000	57,000	$             -	No effect
Variable costs
Direct material	$   49,020.00	$   49,740.00	$    720.00	Unfavorable
Direct labour	$   52,440.00	$   51,480.00	$    960.00	Favorable
Indirect materials	$   25,080.00	$   26,260.00	$ 1,180.00	Unfavorable
Indirect labor	$   21,660.00	$   21,940.00	$    280.00	Unfavorable
Utilities	$   14,250.00	$   14,580.00	$    330.00	Unfavorable
Maintenance	$     5,700.00	$     6,120.00	$    420.00	Unfavorable
Total variable costs	$ 168,150.00	$ 170,120.00	$ 1,970.00	Unfavorable
Fixed costs
Rent	$   10,000.00	$   10,000.00	$             -	No effect
Supervision	$   18,200.00	$   18,200.00	$             -	No effect
Depeciation	$     5,200.00	$     5,200.00	$             -	No effect
Total fixed costs	$   33,400.00	$   33,400.00	$             -	No effect
Total expenses	$ 201,550.00	$ 203,520.00	$ 1,970.00	Unfavorable

Answer c:

	Budget	Actual	Difference
Units	63,000	57,000	$    6,000.00	Unfavorable
Variable costs
Direct material	$   59,598.00	$   49,740.00	$    9,858.00	Favorable
Direct labour	$   63,756.00	$   51,480.00	$ 12,276.00	Favorable
Indirect materials	$   30,492.00	$   26,260.00	$    4,232.00	Favorable
Indirect labor	$   26,334.00	$   21,940.00	$    4,394.00	Favorable
Utilities	$   17,325.00	$   14,580.00	$    2,745.00	Favorable
Maintenance	$     6,930.00	$     6,120.00	$       810.00	Favorable
Total variable costs	$ 204,435.00	$ 170,120.00	$ 34,315.00	Favorable
Fixed costs
Rent	$   10,000.00	$   10,000.00	$                -	No effect
Supervision	$   18,200.00	$   18,200.00	$                -	No effect
Depeciation	$     5,200.00	$     5,200.00	$                -	No effect
Total fixed costs	$   33,400.00	$   33,400.00	$                -	No effect
Total expenses	$ 237,835.00	$ 203,520.00	$ 34,315.00	Favorable

In case of any doubt, please feel free to comment.