Chapter 7, Problem 3E

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 significantly 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 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?