Question

# Activity-Based Flexible Budgeting Foy Company has a welding activity and wants to develop a flexible budget...

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

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

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