Static Budget versus Flexible Budget
The production supervisor of the Machining Department for NilandCompany agreed to the following monthly static budget for theupcoming year:
Niland Company
Machining Department
Monthly Production Budget |
| Wages | $652,000 |
| Utilities | 31,000 |
| Depreciation | 52,000 |
| Total | $735,000 |
The actual amount spent and the actual units produced in thefirst three months in the Machining Department were as follows:
| Amount Spent | Units Produced |
| January | $692,000 | | 63,000 | |
| February | 667,000 | | 58,000 | |
| March | 632,000 | | 52,000 | |
The Machining Department supervisor has been very pleased withthis performance because actual expenditures for January–March havebeen less than the monthly static budget of $735,000. However, theplant manager believes that the budget should not remain fixed forevery month but should “flex” or adjust to the volume of work thatis produced in the Machining Department. Additional budgetinformation for the Machining Department is as follows:
| Wages per hour | $19.00 |
| Utility cost per direct labor hour | $0.90 |
| Direct labor hours per unit | 0.50 |
| Planned monthly unit production | 69,000 |
a. Prepare a flexible budget for the actualunits produced for January, February, and March in the MachiningDepartment. Assume that depreciation is a fixed cost. Enter allamounts as positive numbers. If required, use per unit amountscarried out to two decimal places.
| Niland Company-Machining Department |
| Flexible Production Budget |
| For the Three Months Ending March 31 |
| January | February | March |
| Units of production | | | |
| Wages | $ | $ | $ |
| Utilities | | | |
| Depreciation | | | |
| Total | $ | $ | $ |
Feedback
For each level of production, show wages, utilities, anddepreciation.
Consider performance and spending.
b. Compare the flexible budget with the actualexpenditures for the first three months.
| January | February | March |
| Total flexible budget | $ | $ | $ |
| Actual cost | | | |
| Excess of actual cost over budget | $ | $ | $ |
What does this comparison suggest?
| The Machining Department has performed better than originallythought. | No |
| The department is spending more than would be expected. | Yes |
