The production supervisor of the Machining Department for Niland Company agreed

Question

The production supervisor of the Machining Department for Niland 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 in the Machining Department were as follows:

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:

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.

b. Compare the flexible budget with the actual expenditures for the first three months.

What does this comparison suggest?

Niland Company
Machining Department
Monthly Production Budget Wages $1,125,000 Utilities 90,000 Depreciation 50,000 Total $1,265,000

Explanation / Answer

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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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

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