Question

5. Skelton Corporation had planned to produce 50,000 units of product during the first quarter of the current year. The company prepared the following budget on May 1:

	Budgeted (50,000 units)
Variable costs:
Direct materials used	$	36,000
Direct labor		45,000
Variable overhead		22,500
Fixed costs:
Manufacturing overhead		58,500
Total manufacturing costs	$	162,000
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During the first quarter, Skelton produced 60,000 units and incurred total manufacturing costs of $184,000.

For the 2 questions, below, asked, show your calculations to help explain your choice.

a. Which of the following amounts should not be included in Skelton's flexible budget at a 60,000-unit level? Explain the reasoning behind your choice

A) Direct materials used, $43,200

B) Direct labor, $54,000

C) Variable overhead, $27,000

D) Fixed manufacturing overhead, $70,200

b. A performance report for Skelton's first quarter of operations using a flexible budget approach would show:

A) Actual costs over budget by $1,300.

B) Actual costs over budget by $11,700.

C) Actual costs over budget by $15,150.

D) Total costs per the flexible budget of $194,400.

Answer 1

Based on the information available for Skelton corporation, we can answer the question as follows:-

	Total units	50,000	60,000
Particulars	Amount	Budgeted Cost per unit (A)	Flexible budget for 60,000 units(B)	Actual costs for 60,000 units
Direct materials	36,000	0.72	43,200
Direct Labor	45,000	0.9	54,000
Variable Overhead	22,500	0.45	27,000
Fixed costs:	58,500		58,500
Total Manufacturing overhead	162,000		182,700	184,000

Step 1:-

We calculated the budgeted cost per unit as follows:- Total amount/50,000 units

Step 2:-

Using the per unit cost determined at (A) above, we developed a budget for 60,000 units. This is process is called the Flexible budget for 60,000 units that the company producted at (B).

Step 3:-

Compared the actual total costs incurred for 60,000 units with the budgeted total costs for 60,000 units.

Based on the above calculations, we can answer the questions as follows:-

a. Which of the following amounts should not be included in Skelton's flexible budget at a 60,000-unit level? Explain the reasoning behind your choice

Option A is incorrect. The Direct materials used for a 60,000 unit level based on our calculations is $43,200 which matches our calculations. As such, this is included in Skelton's flexible budget.

Option B is incorrect. The Direct labour used for a 60,000 unit level based on our calculations is $54,000 which matches our calculations. As such, this is included in Skelton's flexible budget.

Option C is incorrect. The Variable overhead used for a 60,000 unit level based on our calculations is $27,000 which matches our calculations. As such, this is included in Skelton's flexible budget.

Option D is incorrect. The fixed expenses for Skelton's flexible budget would remain at $58,500 and as such this option is incorrect. Fixed expenses do not change based on the number of units produced. As such, this is not included in Skelton's Flexible budget.

b. A performance report for Skelton's first quarter of operations using a flexible budget approach would show:

Option A is correct. As can be seen from our calculation above there is an excess of $1,300 ($184,000 actual costs - $182,700 flexible budget cost) noted in our comparisons. As such , this option is the right answer.

Option B is incorrect. The $11,700 excess of actuals over the budget is incorrect and hence is not the right answer.

Option C is incorrect. The $15,150 excess of actuals over the budget is incorrect and hence is not the right answer.

Option D is incorrect. The total cost per flexible budget as observed in the calculations above is $182,700. As such, this option is incorrect.