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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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   $1,125,000
Utilities   90,000
Depreciation   50,000
Total   $1,265,000

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 $1,100,000 80,000
February 1,200,000 90,000
March 1,250,000 95,000

  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 $1,265,000. 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 $15.00
Utility cost per direct labor hour $1.20
Direct labor hours per unit 0.75
Planned monthly unit production 100,000
  1. a.  Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume that depreciation is a fixed cost.
  2. b. Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?

a.

To determine

Budgeting is a process to prepare the financial statement by the manager to estimate the organization’s future actions. It is also helpful to satisfy the everyday activities.

Production Budget shows the quantities of units that a company must produce to meet the budgeted sales and inventory.

To Prepare: The flexible budget for the actual units produced for January, February, and March in the machining department.

Explanation

The following table shows the flexible budget for the actual units produced.

b.

To determine

To Compare: The flexible budget with the actual expenditures for the first three months.

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