Static Budget versus Flexible Budget The production supervisor of the Machining

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:

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 significantly less than the monthly static budget of 371,000. 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.

Feedback

For each level of production, show wages, utilities, and depreciation.

Consider performance and spending.

Learning Objective 2, Learning Objective 4.

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 $305,000 Utilities 25,000 Depreciation 41,000 Total $371,000

Explanation / Answer

a. Flexible budget:

b.

c.

Both answers are correct:

What does this comparison suggest?

Niland Company-Machining Department Flexible Production Budget For the Three Months Ending March 31 January February March Units of production 70,000 63,000 57,000 Wages 280000 252000 228000 Utilities 22750 20475 18525 Depreciation 41000 41000 41000 Total 343750 313475 287525 Supporting calculations: Units of production 70,000 63,000 57,000 Hours per unit 0.25 0.25 0.25 Total hours of production 17500 15750 14250 Wages per hour 16 16 16 Total wages 280000 252000 228000 Total hours of production Utility costs per hour 1.3 1.3 1.3 Total utilities 22750 20475 18525

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