question archive The productions supervisor of the Machining department for Cramer Company agreed to the following monthly static budget for the up coming year: Cramer Company Machining Department Monthly Production Budget Wages ………………………………………………… $552,000 Utilities …………………………………………………
The productions supervisor of the Machining department for Cramer Company agreed to the following monthly static budget for the up coming year: Cramer Company Machining Department Monthly Production Budget Wages ………………………………………………… $552,000 Utilities …………………………………………………
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The productions supervisor of the Machining department for Cramer Company agreed to the following monthly static budget for the up coming year:
Cramer Company
Machining Department
Monthly Production Budget
Wages ………………………………………………… $552,000
Utilities ………………………………………………….. 48,300
Depreciation …………………………………………….. 60,000
Total …………………………………………………… $660,300
The actual amount spent and the actual units produced in the first three months of 2012 in the Machining Department were as follows:
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Amount Spent |
Units Produced |
|
January |
$545,000 |
90,000 |
|
February |
595,000 |
100,000 |
|
March |
649,000 |
110,000 |
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. Additonal budget information for the Machining Department is as follows:
Wages per hour …………………………. $16.00
Utilities cost per direct labor hour ………. $1.40
Direct labor hours per unit ………………... 0.30
Planned monthly unit production ……... 115,000
(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.
(b) Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?
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(a)
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A |
B |
C |
D |
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1 |
CRAMER COMPANY x MACHINING DEPARTMENT |
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2 |
Flexible Production Budget |
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3 |
For the Three Months Ending March 31, 2012 |
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4 |
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January |
February |
March |
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5 |
Units of production |
90,000 |
100,000 |
110,000 |
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6 |
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7 |
Wages |
$432,000 |
$480,000 |
$528,000 |
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8 |
Utilities |
37,800 |
42,000 |
46,200 |
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9 |
Depreciation |
60,000 |
60,000 |
60,000 |
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10 |
Total |
$529,800 |
$582,000 |
$634,200 |
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11 |
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12 |
Supporting calculations: |
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13 |
Units of production |
90,000 |
100,000 |
110,000 |
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14 |
Hours per unit |
× 0.30 |
× 0.30 0.30 |
× 0.30 |
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15 |
Total hours of production |
27,000 |
30,000 |
33,000 |
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16 |
Wages per hour |
× $16.00 |
× $16.00 |
× $16.00 |
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17 |
Total wages |
$432,000 |
$480,000 |
$528,000 |
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18 |
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19 |
Total hours of production |
27,000 |
30,000 |
33,000 |
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20 |
Utility cost per hour |
× $1.40 |
× $1.40 |
× $1.40 |
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21 |
Total utilities |
$ 37,800 |
$ 42,000 |
$ 46,200 |
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.
(b)
January February March
Total flexible budget................................... $529,800 $582,000 $634,200
Actual cost.................................................. 545,000 595,000 649,000
Excess of actual cost over budget.............. $ (15,200) $ (13,000) $ (14,800)
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.
