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	$590,000
Utilities	28,000
Depreciation	47,000
Total	$665,000

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	$626,000		57,000
February	598,000		52,000
March	571,000		47,000

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 665,000. 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	$19
Utility cost per direct labor hour	$0.9
Direct labor hours per unit	0.5
Planned monthly unit production	63,000

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	57,000	52,000	47,000
	$	$	$
Total	$	$	$
Supporting calculations:
Units of production	57,000	52,000	47,000
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	$	$	$

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

			Jan	Feb	March
units of production			57,000	52,000	47,000
Wages			541500	494000	446500
Utilities			25650	23400	21150
Depreciation			47,000	47,000	47,000
total			614150	564400	514650
supporting calculations:
units of production			57,000	52,000	47,000
hours per unit			0.5	0.5	0.5
total hours of production			28500	26000	23500
Wages per hour			19	19	19
total wages			541500	494000	446500
total hours of production			28500	26000	23500
utility costs per hour			0.9	0.9	0.9
total utility			25650	23400	21150
b)			January	Feburary	March
Total Flexible Budget			614150	564400	514650
Actual cost			626,000	598,000	571,000
Excess of actual cost over budget			11,850	33,600	56,350
performed better than orginally thought					NO
Department is spending more					YES