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	$52,460	$51,460	$1,000	Favorable
Direct labor	57,340	53,940	3,400	Favorable
Indirect materials	26,840	27,140	300	Unfavorable
Indirect labor	18,300	17,890	410	Favorable
Utilities	15,250	15,060	190	Favorable
Maintenance	6,100	6,350	250	Unfavorable
Total variable	176,290	171,840	4,450	Favorable
Fixed costs
Rent	11,000	11,000	–0–	Neither Favorable nor Unfavorable
Supervision	18,000	18,000	–0–	Neither Favorable nor Unfavorable
Depreciation	7,900	7,900	–0–	Neither Favorable nor Unfavorable
Total fixed	36,900	36,900	–0–	Neither Favorable nor Unfavorable
Total costs	$213,190	$208,740	$4,450	Favorable

The monthly budget amounts in the report were based on an expected production of 61,000 units per month or 732,000 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 59,000 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, 65,000 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

	Variable cost per unit = 176290/61000
			2.89
a)	the Formula is
	$36,900	+	variable cost of		$2.89	per unit
b)			Flexible budget
				Budget	Actual	Difference
	Activity level			59,000	59000
	Variable costs
	Direct materials		0.86	50740	51,460	720	U
	direct labor		0.94	55460	53,940	1,520	F
	indirect materials		0.44	25960	27,140	1,180	U
	indirect labor		0.3	17700	17,890	190	U
	Utilities		0.25	14750	15,060	310	U
	Maintenance		0.1	5900	6,350	450	U
	total variable costs		2.89	170510	171,840	1,330	U
	Fixed cost
	Rent			11,000	11,000	0	N
	supervision			18,000	18,000	0	N
	Depreciation			7,900	7,900	0	N
	total fixed cost			36,900	36,900	0	N
	total cost			207,410	208,740	1,330	U
c)			Flexible budget
				Budget	Actual	Difference
	Activity level			65,000	65000
	Variable costs
	Direct materials		0.86	55900	56,606	706	U
	direct labor		0.94	61100	59,334	1,766	F
	indirect materials		0.44	28600	29,854	1,254	U
	indirect labor		0.3	19500	19,679	179	U
	Utilities		0.25	16250	16,566	316	U
	Maintenance		0.1	6500	6,985	485	U
	total variable costs		2.89	187850	189,024	1,174	U
	Fixed cost
	Rent			11,000	11,000	0	N
	supervision			18,000	18,000	0	N
	Depreciation			7,900	7,900	0	N
	total fixed cost			36,900	36,900	0	N
	total cost			224,750	225,924	1,174	U