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Question Completion:
Ratchet Company uses budgets in controlling costs. The August 2017 budget report for the company's Assembling
Department is as follows.
Ratchet Company
Budget Report
Assembling Department
For the Month Ended August 31, 2017
Difference
Favorable F
Manufacturing Cost Budget Actual Unfavorable U
Variable costs
Direct materials $48,000 $47,000 $1,000 F
Direct labor 54,000 51,200 2,800 F
Indirect materials 24,000 24,200 200 U
Indirect labor 18,000 17,500 500 F
Utilities 15,000 14,900 100 F
Maintenance 12,000 12,400 400 U
Total variable 171,000 167,200 3,800 F
Fixed costs
Rent 12,000 12,000 0
Supervision 17,000 17,000 0
Depreciation 6,000 6,000 0
Total fixed 35,000 35,000 0
Total costs $ 206,000 $ 202,200 $3,800 F
The monthly budget amounts in the report were based on an expected production of 60,000 units per month or 720,000 units per year. The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August because only 58,000 units were produced.
Instructions
(a) State the total monthly budgeted cost formula.
(b) Prepare a budget report for August using flexible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget data?
Answer:
Ratchet Company
a. The total monthly budget cost formula is:
= $35,000 + $2.85x
where x = budgeted monthly units
b. Flexible Budget for August:
Ratchet Company
Budget Report
Assembling Department
For the Month Ended August 31, 2017
Difference
Favorable F
Manufacturing Cost Flexible Actual Unfavorable U
Variable costs
Direct materials $46,400 $47,000 $600 U
Direct labor 52,200 51,200 1,000 F
Indirect materials 23,200 24,200 1,000 U
Indirect labor 17,400 17,500 100 U
Utilities 14,500 14,900 400 U
Maintenance 11,600 12,400 800 U
Total variable 165,300 167,200 1,900 U
Fixed costs
Rent 12,000 12,000 0
Supervision 17,000 17,000 0
Depreciation 6,000 6,000 0
Total fixed 35,000 35,000 0
Total costs $200,300 $ 202,200 $1,900 U
c. A flexible budget report provides a better basis for evaluating the Assembly Department's performance as it uses the same activity level as the actual results with which the budget is compared.
Explanation:
a) Data and Calculations:
Flexing the variable costs:
Direct materials = $46,400 ($48,000/60,000 * 58,000)
Direct labor 52,200 (54,000/60,000 * 58,000)
Indirect materials 23,200 (24,000/60,000 * 58,000)
Indirect labor 17,400 (18,000/60,000 * 58,000)
Utilities 14,500 (15,000/60,000 * 58,000)
Maintenance 11,600 (12,000/60,000 * 58,000)
