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 \$14,000 per year per unit
• Six welding employees each paid a salary of \$55,000 per year (A total of 12,000 welding hours are supplied by the six workers.)
• Welding supplies: \$400 per job
• Welding hours: 4 hours used per job

During the year, the activity operated at 90 percent of capacity and incurred the following actual activity and resource costs.

• Lease cost: \$56,000
• Salaries: \$346,500
• Parts and supplies: \$1,074,500

Required:

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

Welding cost = \$ _____________ + \$ 100

1. Activity flexible budgeting is the prediction of what activity costs will be as activity output changes.
1. 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

Welding: Actual Cost Budgeted Cost (90% level) Budget Variance Variance

 Fixed cost U    ✔ Variable cost F    ✔

1. A performance report shows actual cost, budgeted cost, and budget variance (favorable or unfavorable) for fixed cost and variable cost.
1. 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 = \$__________       + \$ 130

1. Flexible Budget Formula:

Welding cost = \$ 386,000 + \$ 100 per hour.

Computation of total fixed cost per year :

 Lease Cost of Welding Units ( \$ 14,000 x 4) \$ 56,000 Salary of Welding Employees ( \$ 55,000 x 6) 330,000 Total Fixed Cost \$ 386,000

Variable cost per hour = \$ 400 / 4 hours = \$ 100q,

q is the number of welding hours used.

2.

 Foy Company Activity Based Performance Report For the year ended..... Actual Cost Budgeted Cost Budget Variance Fixed Cost \$ 402,500 \$ 386,000 \$ 16,500 U Variable Cost 1,074,500 1,080,000 * \$ 5,500 F

Budgeted variable cost = 12,000 hours x 0.90 x \$ 100 per hour = \$ 1,080,000.

3. The only fixed cost per year would be the lease cost of \$ 56,000.

Variable cost per welding hour would comprise of cost of supplies, i.e. \$ 100, and the cost of outsourcing welders per hour of \$ 30.

Welding Cost = \$ 56,000 + \$ 130q

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