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 $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    ✔

           

2. 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    

Answer 1

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