Reference no: EM133015709

Static Budget versus Flexible Budget

The production supervisor of the Machining Department for Celtic Company agreed to the following monthly static budget for the upcoming year:

Celtic Company

Machining Department

Monthly Production Budget

Wages $916,000

Utilities 61,000

Depreciation 102,000

Total $1,079,000

The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows:

Amount Units

Produced Spent

January $1,018,000 112,000

February 973,000 102,000

March 930,000 92,000

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 $1,079,000. 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 $1.00

Direct labor hours per unit 0.50

Planned monthly unit production 122,000

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. If required, use per unit amounts carried out to two decimal places.

Celtic Company-Machining Department

Flexible Production Budget

For the Three Months Ending March 31

January February March

Units of production

Wages

Depreciation

Total

b. Compare the flexible budget with the actual expenditures for the first three months.

January February March

Actual cost

Total flexible budget

Excess of actual cost over budget

What does this comparison suggest?

The Machining Department has performed better than originally thought. (Y or N)

The department is spending more than would be expected. (y or n)