FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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 |
| 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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