The production .supervisor of the Machining Department for Gilman Company agreed

Question

The production .supervisor of the Machining Department for Gilman Company agreed to the following monthly static budget for the upcoming year: The actual amount spent and the actual units produced in the first three months of 2014 in the Machining Department were as follows: The Machining Department supervisor has been very pleased with this performance, since actual expenditures have been less than the monthly budget. 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: Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume depreciation is a fixed cost. Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?

Explanation / Answer

Gilman Company Machining Department Flexible production budget Particulars January February March Units of production 90000 100000 110000 Wages $ 3,37,500.00 $ 3,75,000.00 $ 4,12,500.00 Utilities $    40,500.00 $    45,000.00 $    49,500.00 Depreciation $    60,000.00 $    60,000.00 $    60,000.00 Total $ 4,38,000.00 $ 4,80,000.00 $ 5,22,000.00 Supporting calculations: Units of production (a) 90000 100000 110000 Hours per unit (b) 0.25 0.25 0.25 Total hours of production (a*b) 22500 25000 27500 Wages per hour $           15.00 $           15.00 $           15.00 Total wages $ 3,37,500.00 $ 3,75,000.00 $ 4,12,500.00 Total hours of production 22500 25000 27500 Utility cost per hour $             1.80 $             1.80 $             1.80 Total utilities $    40,500.00 $    45,000.00 $    49,500.00 Depreciation is a fixed cost, so it does not “flex” with changes in production. Since it is the only fixed cost, the variable and fixed costs are not classified in the budget Particulars January February March Total flexible budget $ 4,38,000.00 $ 4,80,000.00 $ 5,22,000.00 Actual cost $ 4,50,000.00 $ 4,92,000.00 $ 5,40,000.00 Excess of actual cost over budget $ -12,000.00 $ -12,000.00 $ -18,000.00 The excess of actual cost over the flexible budget suggests that the Machining Department has not performed as well as originally thought. The department is spending more than would be expected. The flexible budget is a superior budgeting approach in this situation since wages and utility costs vary with production. Thus, the budget for these costs should adjust (flex) to the actual level of production. Actual costs can rightfully be compared to the flexible budget, because both numbers are based on actual volumes

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