Question
In: Accounting
Scenario: Good Woods Inc. is a manufacturer of cabinetry products. The company uses a flexible budget...
Scenario: Good Woods Inc. is a manufacturer of cabinetry products. The company uses a flexible budget for manufacturing overhead based on direct labor hours. For 2019, the master overhead budget for the Assembly Department based on 300,000 direct labor hours was as follows:
Variable Costs:
Indirect Labor $362,000
Materials $148,000
Maintenance $210,000
Utilities $120,000
Fixed Costs:
Supervision $60,000
Depreciation $22,000
Property Taxes $18,000
Insurance $13,000
During August, 24,000 direct labor hours were worked. The company incurred the following variable costs in August: indirect labor $30,200; materials $12,000; maintenance $17,000 and; utilities $9,500. Actual fixed overhead costs were the same as the monthly budgeted fixed costs.
You have been tasked with preparing a flexible budget and assessing the Assembly Department’s supervisor performance. Please respond each question below:
- Prepare a flexible budget for the Assembly Department for the month of August.
- Identify the difference between budgeted and actual costs as favorable or unfavorable.
- Did the supervisor do a good, average or poor job in controlling expenses? Explain your rationale.
- Would you recommend that the Assembly Department uses a static budget instead? Why or why not?
- What type of responsibility center do you believe that the Assembly Department is? Explain your rationale.
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| Good Woods Inc. | |||||
| Calculation of overhead rates | Indirect Labor | Materials | Maintenance | Utilities | Note |
| Budgeted costs | 362,000.00 | 148,000.00 | 210,000.00 | 120,000.00 | A |
| Budgeted direct labor hours | 300,000.00 | 300,000.00 | 300,000.00 | 300,000.00 | B |
| Overhead rate | 1.21 | 0.49 | 0.70 | 0.40 | C=A/B |
| Calculation for flexible budget: | A | B= 24,000* A |
| Items | Overhead rate | Variable Cost |
| Labor Hours | 24,000.00 | |
| Indirect Labor | 1.21 | 28,960.00 |
| Materials | 0.49 | 11,840.00 |
| Maintenance | 0.70 | 16,800.00 |
| Utilities | 0.40 | 9,600.00 |
| Flexible budget: | |
| Items | Amount $ |
| Indirect Labor | 28,960.00 |
| Materials | 11,840.00 |
| Maintenance | 16,800.00 |
| Utilities | 9,600.00 |
| Supervision | 60,000.00 |
| Depreciation | 22,000.00 |
| Property taxes | 18,000.00 |
| Insurance | 13,000.00 |
| Total Expense | 180,200.00 |
| Answer 3 | ||||
| Flexible budget variance report: | Flexible budget Variance | |||
| Particulars | Actual Results | Flexible budget | Amount | Remarks |
| Labor Hours | 24,000.00 | 24,000.00 | ||
| Expenses: | ||||
| Indirect Labor | 30,200.00 | 28,960.00 | 1,240.00 | Unfavorable |
| Materials | 12,000.00 | 11,840.00 | 160.00 | Unfavorable |
| Maintenance | 17,000.00 | 16,800.00 | 200.00 | Unfavorable |
| Utilities | 9,500.00 | 9,600.00 | (100.00) | Favorable |
| Supervision | 60,000.00 | 60,000.00 | - | NA |
| Depreciation | 22,000.00 | 22,000.00 | - | NA |
| Property taxes | 18,000.00 | 18,000.00 | - | NA |
| Insurance | 13,000.00 | 13,000.00 | - | NA |
| Total Expense | 181,700.00 | 180,200.00 | 1,500.00 | Unfavorable |
| Did the supervisor do a good, average or poor job in controlling expenses? Explain your rationale. |
| It was average job. Because total cost has increased by $ 1,500. |
| Rationale is fixed costs are same as before so only control lack was in variable costs. |
| Would you recommend that the Assembly Department uses a static budget instead? Why or why not? |
| No static budget is not recommended. Because static budget is made for a fixed activity and is not suitable for different level of activities. |
| What type of responsibility center do you believe that the Assembly Department is? Explain your rationale. |
| Assembly Department is cost center. |
| Rationale: Because revenue data is not given only cost data is given. |
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