Question

Static Budget versus Flexible Budget The production supervisor of the Machining Department for Hagerstown Company agreed...

Static Budget versus Flexible Budget

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

Hagerstown Company
Machining Department
Monthly Production Budget
Wages $663,000
Utilities 31,000
Depreciation 53,000
Total $747,000

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
May $704,000 128,000
June 673,000 117,000
July 639,000 105,000

The Machining Department supervisor has been very pleased with this performance because actual expenditures for May–July have been significantly less than the monthly static budget of 747,000. 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 $19.00
Utility cost per direct labor hour $0.90
Direct labor hours per unit 0.25
Planned monthly unit production 140,000

a. Prepare a flexible budget for the actual units produced for May, June, and July in the Machining Department. Assume depreciation is a fixed cost. If required, use per unit amounts carried out to two decimal places.

Hagerstown Company
Machining Department Budget
For the Three Months Ending July 31
May June July
Units of production 128,000 117,000 105,000
Total
Supporting calculations:
Units of production 128,000 117,000 105,000
Hours per unit
Total hours of production
Wages per hour
Total wages
Total hours of production
Utility costs per hour
Total utilities

b. Compare the flexible budget with the actual expenditures for the first three months.

May June July
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.

Homework Answers

Answer #1

1.

May June July
Units of production 128,000 117,000 105,000
Total $689,800 (608,000+28,800+53,000) $635,075 (555,750+26,325+53,000) $575,375 (498,750+23,625+53,000)
Supporting calculations:
Units of production 128,000 117,000 105,000
Hours per unit 0.25 0.25 0.25
Total hours of production 32,000 29,250 26,250
Wages per hour $19 $19 $19
Total wages $608,000 $555,750 $498,750
Total hours of production 32,000 29,250 26,250
Utility cost per hour $0.90 $0.90 $0.90
Total utilities $28,800 $26,325 $23,625

2.

May June July
Total flexible budget $689,800 $635,075 $575,375
Actual cost 704,000 673,000 639,000
Excess of actual cost over budget 14,200 37,925 63,625

3.

This comparison suggest the department is spending more than would be expected.

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