Question

Activity-Based Flexible Budgeting

Foy Company has a welding activity and wants to develop a flexible budget formula for the activity. The following resources are used by the activity:

• Four welding units, with a lease cost of $12,000 per year per unit

• Six welding employees each paid a salary of $52,000 per year (A total of 9,000 welding hours are supplied by the six workers.)

• Welding supplies: $300 per job

• Welding hours: 3 hours used per job

During the year, the activity operated at 85 percent of capacity and incurred the following actual activity and resource costs.

• Lease cost: $48,000

• Salaries: $327,600

• Parts and supplies: $759,800

Required:

1. Prepare a flexible budget formula for the welding activity using welding hours as the driver.

Welding cost = $ + $ X

2. Prepare a performance report for the welding activity. In the last column of Foy Company Activity-Based Performance Report, if variance amount is unfavorable select "U" , select "F", if it is Favorable and select "NA" if there is no variance.

Foy Company
Activity-Based Performance Report
Activity Actual Cost Budgeted Cost (85% level) Budget Variance Variance
Welding:
Fixed cost $ $ $
Variable cost

3. What if welders were hired through outsourcing and paid $30 per hour (the welding equipment is provided by Foy)? Repeat Requirement 1 for the outsourcing case.

Welding cost = $ + $ X

Answer 1

1. Fixed Cost:

Leased Welding equipment	$48,000($12,000*4)
Welder Salaries	$312,000($52,000*6)
Total	$360,000

Variable Cost:

Supplies:$300/3=$100/hr

Formula:Welding Cost=$360,000+100X

2. FOY COMPANY

Activity Based Performane Report

Activity	Actual cost	Budgeted Cost(at 85% capacity)	Budgeteed Variance
Welding:
Fixed Cost	375,600	360,000	15,600 U
Variable cost	759,800	765,000(100*.85*9000)	5200 F

3. if welders were hired through outsourcing and paid $30 per hour the Welding cost formula would be=

$48,000+$130X

Because the only Fixed cost component is Leased equipment , hence fixed cost is $48,000

Also the Labour cost is added with the previous variable cost which is =$100+30=$130