Question

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	$1,125,000
Utilities	90,000
Depreciation	50,000
Total	$1,265,000

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	$1,100,000		80,000
February	1,200,000		90,000
March	1,250,000		95,000

The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been less than the monthly static budget of $1,265,000. 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	$15.00
Utility cost per direct labor hour	$1.20
Direct labor hours per unit	0.75
Planned monthly unit production	100,000

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. Enter all amounts as positive numbers.

NILAND COMPANY—MACHINING DEPARTMENT
Flexible Production Budget
For the Three Months Ending March 31
	January	February	March
Units of production
Wages	$	$	$
Utilities
Depreciation
Total	$	$	$

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.
The department is spending more than would be expected.

Answer 1

Solution:

Part 1 –

NILAND COMPANY—MACHINING DEPARTMENT
Flexible Production Budget
For the Three Months Ending March 31
	January	February	March
Units of production	80000	90000	95000
Wages (Units produced x Direct labor hour per unit 0.75 x Wage rate per hour $15)	$900,000 (80,000*0.75*$15)	$1,012,500 (90,000*0.75*$15)	$1,068,750 (95,000*0.75*$15)
Utilities (Units produced x DLH per unit 0.75 x Utility cost per DLH $1.20)	$72,000 (80,000*0.75*$1.2)	$81,000 (90,000*0.75*$1.2)	$85,500 (95,000*0.75*$1.2)
Depreciation	$50,000	$50,000	$50,000
Total	$1,022,000	$1,143,500	$1,204,250

Part 2 –

	January	February	March
Total flexible budget	$1,022,000	$1,143,500	$1,204,250
Actual cost	$1,100,000	$1,200,000	$1,250,000
Excess of actual cost over budget	$78,000	$56,500	$45,750

What does this comparison suggest --- The department is spending more than would be expected.

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