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 $2,250,000 Utilities 72,000 Depreciation 36,000 Total $2,358,000 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 $1,600,000 40,000 June 1,950,000 48,000 July 2,200,000 52,000 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 $2,358,000. However, the plant manager believes that the budget shouldnot 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 $25.0 Utility cost per direct labor hour  $0.80 Direct labor hour per unit  1.5 Planned monthly unit production 60,000   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.b. Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?

Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter8: Budgeting
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Problem 3E: Static budget versus flexible budget The production supervisor of the Machining Department for...
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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 $2,250,000
Utilities 72,000
Depreciation 36,000
Total $2,358,000

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 $1,600,000 40,000
June 1,950,000 48,000
July 2,200,000 52,000

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 $2,358,000. 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 $25.0
Utility cost per direct labor hour  $0.80
Direct labor hour per unit  1.5
Planned monthly unit production 60,000

 

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.
b. Compare the flexible budget with the actual expenditures for the first 
three months. What does this comparison suggest?

 

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