Question

Ratchet Company uses budgets in controlling costs. The August 2017 budget report for th Department is as follows.

Ratchet Company

Budget Report

Assembling Department

For the Month Ended August 31, 2017    Difference Favorable F

Manufacturing Cost                    Budget                           Actual                          Unfavorable U

Variable costs

Direct materials                         $ 48,000                        47,000                            $1,000 F

Direct labor                                  54,000                         51,200                               2,800 F

Indirect materials                         24,000                        24,200                                 200 U

Indirect labor                               18,000                         17,500                                 500 F

Utilities                                         15,000                         14,900                                 100 F

Maintenance                                12,000                         12,400                                 400 U

Total variable                              171,000                      167,200                               3,800 F

Fixed costs

Rent                                              12,000                        12,000                                      0

Supervision                                   17,000                        17,000                                      0

Depreciation                                   6,000                          6,000                                      0

Total fixed                                      35,000                        35,000                                      0

Total costs                                $ 206,000                   $ 202,200                                $3,800 F

The monthly budget amounts in the report were based on an expected production of 60,00 or 720,000 units per year. The Assembling Department manager is pleased with the report or at least praise for a job well done. The company president, however, is unhappy with the because only 58,000 units were produced.

Instructions

(a) State the total monthly budgeted cost formula.

(b) Prepare a budget report for August using flexible budget data. Why does this report pr basis for evaluating performance than the report based on static budget data?

(c) In September, 64,000 units were produced. Prepare the budget report using flexible bu (1) each variable cost was 10% higher than its actual cost in August, and (2) fixed cos September as in August

Answer 1

(a) The formula is fixed costs $35,000 plus variable costs of $2.75 per unit ($165,000 ÷ 60,000 units). Ratchet COMPANY     Assembling Department Flexible Budget Report     For the Month Ended August 31, 2017 Budget at 58,000 Units Actual Costs 58,000 Units Difference Favorable F Unfavorable U Units Variable costs Direct materials ($.80 X 58,000) 46400 47000 -600 Direct labor ($.90 X 58,000) 52200 51200 1000 Indirect materials ($.40 X 58,000 23200 24200 -1000 Indirect labor ($.30 X 58,000) 17400 17500 -100 Utilities ($.25 X 58,000 14500 14900 -400 Maintenance ($.10 X 58,000) 5800 6200 -400 Total variable ($2.75 X 58,000) 159500 161000 -1500 Fixed costs Rent 12000 12000 0 Supervision 17000 17000 0 Depreciation 6000 6000 0 Total fixed 35000 35000 0 Total costs 194500 196000 -1500 Example : per ut Direct Material = 48000/60000 = 0.8 This report provides a better basis for evaluating performance because the budget is based on the level of activity actually achieved. The manager should be criticized because every variable cost was over budget except for direct labor. c Ratchet COMPANY Assembling Department Flexible Budget Report For the Month Ended September 30, 2017 Units Budget at 64,000 Units Actual Costs 64,000 Units Difference Favorable F Unfavorable U Variable costs Direct materials ($.80 X 64,000) 51200 51700 -500 Direct labor ($.90 X 64,000) 57600 56320 1280 Indirect materials ($.40 X 64,000 25600 26620 -1020 Indirect labor ($.30 X 64,000) 19200 19250 -50 Utilities ($.25 X 64,000) 16000 16390 -390 Maintenance ($.10 X 64,000) 6400 6820 -420 Total variable 176000 177100 -1100 Fixed costs Rent 12000 12000 0 Supervision 17000 17000 0 Depreciation 6000 6000 0 Total fixed 35000 35000 0 Total costs 211000 212100 -1100 August must be increased 10% as follows: August (actual) September (actual) Direct materials 47000*110% 51700 Direct labor 51200*110% 56320 Indirect materials 24200*110% 26620 Indirect labor 17500*110% 19250 Utilities 14900*110% 16390 Maintenance ( 6200*110% 6820 161000 177100