Question

The production supervisor of the Machining Department for Niland Company agreed to the following monthly static budget for the upcoming year:

Niland Company Machining Department Monthly Production Budget
Wages	$486,000
Utilities	28,000
Depreciation	47,000
Total	$561,000

The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows:

	Amount Spent		Units Produced
January	$529,000		85,000
February	509,000		78,000
March	483,000		70,000

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 $561,000. 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:

Wages per hour	$21.00
Utility cost per direct labor hour	$1.20
Direct labor hours per unit	0.25
Planned monthly unit production	93,000

a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume that depreciation is a fixed cost. Enter all amounts as positive numbers. If required, use per unit amounts carried 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	$	$	$

b. Compare the flexible budget with the actual expenditures 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 originally thought. (yes, no)
The department is spending more than would be expected. (yes, no)

Answer 1

(a)

	Jan	Feb	March
Units of production	85,000	78,000	70,000
Labor hrs (0.25 per unit)	21,250	19,500	17,500
Wages [21 per hr]	446,250	409,500	367,500
Utilities[1.20 per hr]	25,500	23,400	21,000
Depreciation [Fixed]	47,000	47,000	47,000
Total	518,750	479,900	435,500

(b)

	Jan	Feb	March
Total flexible budget	518,750	479,900	435,500
Actual cost	529,000	509,000	483,000
Excess of actual cost over budget	10,250	29,100	47,500

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.