Question

Static Budget versus Flexible Budget

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	$264,000
Utilities	15,000
Depreciation	26,000
Total	$305,000

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	$288,000		51,000
February	278,000		47,000
March	263,000		42,000

The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been significantly less than the monthly static budget of 305,000. 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	$19
Utility cost per direct labor hour	$1.1
Direct labor hours per unit	0.25
Planned monthly unit production	56,000

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. If required, use per unit amounts carried out to two decimal places.

Niland Company
Machining Department Budget
For the Three Months Ending March 31
	January	February	March
Units of production	51,000	47,000	42,000
	$	$	$
Total	$	$	$
Supporting calculations:
Units of production	51,000	47,000	42,000
Hours per unit	x	x	x
Total hours of production
Wages per hour	x $	x $	x $
Total wages	$	$	$
Total hours of production
Utility costs per hour	x $	x $	x $
Total utilities	$	$	$

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.
The department is spending more than would be expected.

Answer 1

a	Machining Department Budget
	For the Three Months Ending March 31
		January	February	March
	Units of production	51,000	47,000	42,000
	Wages	242250	223250	199500
	Utilities	14025	12925	11550
	Depreciation	26000	26000	26000
	Total	282275	262175	237050
	Supporting calculations:
	Units of production	51,000	47,000	42,000
	Hours per unit	0.25	0.25	0.25
	Total hours of production	12750	11750	10500
	Wages per hour	19	19	19
	Total wages	242250	223250	199500
	Total hours of production
	Utility costs per hour	1.1	1.1	1.1
	Total utilities	14025	12925	11550
b		January	February	March
	Total flexible budget	282275	262175	237050
	Actual cost	288000	278000	263000
	Excess of actual cost over budget	-5725	-15825	-25950
	The department is spending more than would be expected.