Teecorp Company uses a flexible budget for its indirect manufacturing costs. For

Question

Teecorp Company uses a flexible budget for its indirect manufacturing costs. For 2015, the company anticipated that it would produce 27,000 units with 4,800 machine-hours and 8,000 employee days. The costs and cost drivers were to be as follows:

                                                     Fixed               Variable                Cost driver

Product handling              $45,000                     $0.75                per unit

Inspection                              12,000                     12.00                per 100 unit batch

Utilities                                          600                        6.00                per 100 unit batch

Maintenance                          1,250                        0.25                per machine-hour

Supplies                                                                       5.00                per employee day

During the year, the company processed 26,500 units, worked 8,200 employee days, and had 4,850 machine-hours. The actual costs for 2015 were:

                                                        Actual costs

Product handling                              $65,000

Inspection                                              16,200

Utilities                                                      2,220

Maintenance                                          2,850

Supplies                                                  39,900

Required:

a.    Prepare the static budget using the overhead items above and then compute the static-budget variances.

b.    Prepare the flexible budget using the overhead items above and then compute the flexible-budget variances.

Explanation / Answer

a) Static Budget Product handling 65250 ( 45000 +27000*0.75) Inspection 15240 (12000+12*27000/100) Utilities 2220 ( 600 + 6*27000/100) Maintenance 2450 (1250 + 0.25*4800) Supplies 40000 (2*8000) Total 125160 Static Budget Variance Static Budget Actual Variance Actual - Budget Product handling 65250 65000 -250 Favourable Inspection 15240 16200 960 unfavourabe Utilities 2220 2220 0 no deviation Maintenance 2450 2850 400 unfavourabe Supplies 40000 39900 -100 Favourable Total 125160 126170 1010 unfavourabe b) Flexible Budget Product handling 64875 ( 45000 +26500*0.75) Inspection 15180 (12000+12*26500/100) Utilities 2190 ( 600 + 6*26500/100) Maintenance 2462.5 (1250 + 0.25*4850) Supplies 41000 (2*8200) Total 125707.5 Flexible Budget variance Flexible Budget Actual Variance Product handling 64875 65000 125 unfavourabe Inspection 15180 16200 1020 unfavourabe Utilities 2190 2220 30 unfavourabe Maintenance 2462.5 2850 387.5 unfavourabe Supplies 41000 39900 -1100 Favourable Total 125707.5 126170 462.5 unfavourabe

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