Question

Static Budget versus Flexible Budget

The production supervisor of the Machining Department for Niland Company agreed to the following monthly static budget for the upcoming year:

Niland Company Machining Department Monthly Production Budget
Wages	$593,000
Utilities	31,000
Depreciation	53,000
Total	$677,000

The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows:

	Amount Spent		Units Produced
January	$638,000		128,000
February	611,000		117,000
March	580,000		105,000

The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been significantly less than the monthly static budget of 677,000. However, the plant manager believes that the budget should not remain fixed for every month but should “flex” or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows:

Wages per hour	$17
Utility cost per direct labor hour	$0.9
Direct labor hours per unit	0.25
Planned monthly unit production	140,000

a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume depreciation is a fixed cost. If required, use per unit amounts carried out to two decimal places.

Niland Company
Machining Department Budget
For the Three Months Ending March 31
	January	February	March
Units of production	128,000	117,000	105,000
Wages	$	$	$
Utilities
Depreciation
Total	$	$	$
Supporting calculations:
Units of production	128,000	117,000	105,000
Hours per unit	x	x	x
Total hours of production
Wages per hour	x $	x $	x $
Total wages	$	$	$
Total hours of production
Utility costs per hour	x $	x $	x $
Total utilities	$	$	$

Feedback

For each level of production, show wages, utilities, and depreciation.

Learning Objective 2, Learning Objective 4.

b. Compare the flexible budget with the actual expenditures for the first three months.

	January	February	March
Total flexible budget	$	$	$
Actual cost
Excess of actual cost over budget	$	$	$

What does this comparison suggest?

The Machining Department has performed better than originally thought.	No
The department is spending more than would be expected.	Yes

Answer 1

Answer -

As per given information,

Hours per unit = 0.25

Wages per hour = $17

Utility cost per hour = $0.9

a. Answer -

Flexible budget for the actual units produced for January, February, and March in the Machining Department

Niland Company
Machining Department Budget
For the Three Months Ending March, 31
	January	February	March
Units of production	128000	117000	105000
Wages	$544000	$497250	$446250
Utilities	$28800	$26325	$23625
Depreciation	$53000	$53000	$53000
Total	$625800	$576575	$522875
Supporting calculations :
Units of production	128000	117000	105000
Hours per unit	* 0.25	* 0.25	* 0.25
Total hours of production	32000	29250	26250
Wages per hour	* 17	* 17	* 17
Total wages	$544000	$497250	$446250
Total hours of production	32000	29250	26250
Utility cost per hour	* 0.9	* 0.9	* 0.9
Total utilities	$28800	$26325	$23625

Note - Depreciation is a fixed cost, so it does not change with changes in production.

Here, Formulas using for supporting calculations are

Total hours of production = Units of production * Hours per unit

Total wages = Total hours of production * Wages per hour

Total utilities = Total hours of production * Utility cost per hour

b. Answer -

Compare the flexible budget with the actual expenditures for the first three months

	January	February	March
Total flexible budget	$625800	$576575	$522875
Actual cost	$638000	$611000	$580000
Excess of actual cost over budget	$(12200)	$(34425)	$(57125)

The Machining Department has performed better than originally thought.	YES
The department is spending more than would be expected.	NO

Here, actual cost is more than flexible budgeted cost that means department is spending more than would be expected.