Static Budget vs. Flexible Budget The production supervisor of the Machining Dep
ID: 2425503 • Letter: S
Question
Static Budget vs. Flexible Budget
The production supervisor of the Machining Department for Rodriguez Company agreed to the following monthly static budget for the upcoming year:
Rodriguez Company
Machining Department Monthly Production Budget
Wages $384,000
Utilities 36,000
Depreciation 60,000
Total $480,000
The actual amount spent and the actual units produced in the first three months of 2016 in the Machining Department were as follows:
Amount Spent Units Produced
January $400,000 90,000
February 440,000 100,000
March 470,000 110,000
The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been less than the monthly static budget of $480,000. 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 $16.00
Utility cost per direct labor hour $1.50
Direct labor hours per unit 0.20
Planned monthly unit production 120,000
Static Budget vs. Flexible Budget
The production supervisor of the Machining Department for Rodriguez Company agreed to the following monthly static budget for the upcoming year:
The actual amount spent and the actual units produced in the first three months of 2016 in the Machining Department were as follows:
The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been less than the monthly static budget of $480,000. 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:
X
Part A: Flexible Budget
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. Enter all amounts as positive numbers.
Total utilities
Static Budget vs. Flexible Budget
The production supervisor of the Machining Department for Rodriguez Company agreed to the following monthly static budget for the upcoming year:
The actual amount spent and the actual units produced in the first three months of 2016 in the Machining Department were as follows:
The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been less than the monthly static budget of $480,000. 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:
X
Part A: Flexible Budget
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. Enter all amounts as positive numbers.
X
Part B: Decision Analysis
b. Compare the flexible budget with the actual expenditures for the first three months. Enter all amounts as positive numbers.
What does this comparison suggest?
Rodriguez CompanyMachining Department
Monthly Production Budget Wages $384,000 Utilities 36,000 Depreciation 60,000 Total $480,000
Explanation / Answer
Rodriguez Company - Machining Department
Flexible Production Budget for the three months ending March 31, 2016
Going by the above comparisons, the department is spending more than would be expected.
Having said that, depreciation is a non-cash cost, and as such should not be matched against "amount spent". Amount spent indicates a cash outflow.
January February March Units produced 90,000 100,000 110,000 Direct labor hours per unit 0.20 0.20 0.20 Direct labor hours 18,000 20,000 22,000 Wages 288,000 320,000 352,000 Utility cost 27,000 30,000 33,000 Depreciation 60,000 60,000 60,000 Total budgeted cost 375,000 410,000 445,000 Total amount spent 400,000 440,000 470,000 Variance 25,000 U 30,000 U 25,000URelated Questions
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