P24-3A Prepare flexible manufacturing overhead budget
Ratchet Company uses budgets in controlling costs. The August 2017 budget report for the company’s Assembling
Department is as follows.
Difference
Favorable F
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?
(c) In September, 64,000 units were produced. Prepare the budget report using flexible budget data, assuming
(1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in
September as in August.
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a “?” .
(a) State the total monthly budgeted cost formula.
Fixed cost Value + variable cost of Value per unit
(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?
Manufacturing Cost
RATCHET COMPANY
Budget Report
Assembling Department
For the Month Ended August 31, 2017
RATCHET COMPANY
Assembling department
Flexible budget Report
For the Month Ended August 31, 2017
Difference
Budget at
Actual Costs
Favorable F
Units 58,000 units 58,000 units Unfavorable U
Variable costs
Direct materials ? Value ?
Direct labor ? Value ?
Indirect materials ? Value ?
Indirect labor ? Value ?
Utilities ? Value ?
Maintenance ? Value ?
Total variable ? ? ?
Fixed costs
Rent Value Value ?
Supervision Value Value ?
Depreciation Value Value ?
Total fixed ? ? ?
Total costs ? ? ?
(c) In September, 64,000 units were produced. Prepare the budget report using flexible budget data, assuming
(1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in
September as in August.
Difference
Budget at
Actual Costs
Favorable F
Units 64,000 units 64,000 units Unfavorable U
Variable costs
Direct materials ? ? ?
Direct labor ? ? ?
Indirect materials ? ? ?
Indirect labor ? ? ?
Utilities ? ? ?
Maintenance ? ? ?
Total variable ? ? ?
Fixed costs
Rent Value Value Value
Supervision Value Value Value
Depreciation Value Value Value
Total fixed ? ? ?
Total costs ? ? ?
Assembling department
Flexible budget Report
For the Month Ended September 30, 2017
RATCHET COMPANY
Response:
After you have completed P24-3A consider the following additional question.
1. Assume that the number of units produced in September changed to 68,000. Revise
the flexible budget report for September assuming (1) each variable cost was 12%
higher than its actual cost in August and (s) fixed costs remain the same in September
as in August.
Response:
P24-3A Solution
(a) State the total monthly budgeted cost formula.
Fixed cost $35,000 + variable cost of $2.85 per unit
Variable cost per unit = $171,000 ÷ 60,000 units = $2.85 per unit.
(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?
Difference
Budget at Actual Costs Favorable F
Units 58,000 units 58,000 units Unfavorable U
Variable costs*
Direct materials ($0.80 x 58,000) $46,400 $47,000 ($600) U
Direct labor ($.90 x 58,000)
52,200 51,200 1,000 F
Indirect materials($.40 x 58,000) 23,200 24,200 (1,000) U
Note: The per unit variable costs are computed by taking the budget amount at 60,000 units
and dividing it by 60,000. For example, direct materials per unit is $48,000 ÷ 60,000 units, or $0.80 per unit.
(c) In September 64,000 units were produced. Prepare the budget report using flexible budget data, assuming
(1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in
September as in August.
Difference
Assembling department
Flexible budget Report
For the Month Ended September 30, 2017
RATCHET COMPANY
RATCHET COMPANY
Assembling department
Flexible budget Report
For the Month Ended August 31, 2017
Variable costs
Direct materials ($0.80 x 64,000) $51,200 $51,700 ($500) U
Direct labor ($.90 x 64,000)
57,600 56,320 1,280 F
Indirect materials($.40 x 64,000) 25,600 26,620 (1,020) U
Fixed costs
Rent 12,000 12,000 0
Supervision 17,000 17,000 0
Note that actual variable costs in September were 10% higher than the actual variable costs in August. Therefore,
to find the actual variable costs in September, the actual variable costs in August must be increased 10% as follows:
August (actual)
September
(actual)
Direct materials $47,000 x 110% = $51,700
Direct labor 51,200 x 110% = 56,320
P24-3A Solution to additonal question
1. Assume that the number of units produced in September changed to 68,000. Revise
the flexible budget report for September assuming (1) each variable cost was 12%
higher than its actual cost in August and (s) fixed costs remain the same in September
as in August.
Difference
Budget at Actual Costs Favorable F
Units 68,000 units 68,000 units Unfavorable U
Variable costs
Direct materials ($0.80 x 68,000) $54,400 $52,640 $1,760 F
Direct labor ($.90 x 68,000) 61,200 57,344 3,856 F
RATCHET COMPANY
Assembling department
Flexible budget Report
For the Month Ended September 30, 2017
The manager’s performance was much better in September than it was in August. Each
variable cost had a favorable variance except for maintenance which was slightly over
budget by 2.1%.
CD24 Prepare flexible manufacturing overhead budget
The Current Designs staff has prepared the annual manufacturing budget for the rotomolded line based on an
estimated annual production of 4,000 kayaks during 2017. Each kayak will require 54 pounds of polyethylene powder
and a finishing kit (rope, seat, hardware, etc.). The polyethylene powder used in these kayaks costs $1.50 per pound,
and the finishing kit cost $170 each. Each kayak will use two kinds of labor – 2 hours of type I labor from people who
run the oven and trim the plastic, and 3 hours of work from type II workers who attach the hatches and seat and other
hardware. The type I employees are paid $15 per hour, and the type II are paid $12 per hour.
Manufacturing overhead is budgeted at $396,000 for 2017, broken down as follows.
Variable costs
Indirect materials $40,000
Manufacturing supplies 53,800
Maintenance and utilities 88,000
181,800
Fixed costs
Supervision 90,000
Insurance 14,400
Depreciation 109,800
214,200
Total $396,000
During the first quarter, ended March 31, 2017, 1,050 units were actually produced with the
following costs.
Polyethylene powder $87,000
Finishing kits 178,840
Type I labor 31,500
Type II labor 39,060
Indirect materials 10,500
Manufacturing supplies 14,150
Maintenance and utilities 26,000
Supervision 20,000
Insurance 3,600
Depreciation 27,450
Total $438,100
Instructions
(a) Prepare the annual manufacturing budget for 2017, assuming that 4,000 kayaks will be produced.
(b) Prepare the flexible budget for manufacturing for the quarter ended March 31, 2017. Assume
activity levels of 900, 1,000 and 1,050 units.
(c)
Assuming the rotomolded line is treated as a profit center, prepare a flexible budget report for
manufacturing for the quarter ended March 31, 2017, when 1,050 units were produced.
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a “?” .
(a) Prepare the annual manufacturing budget for 2017, assuming that 4,000 kayaks will be produced.
4,000 Kayaks
Amount
Budgeted
Costs:
Variable cost
Polyethylene powder ?
Finishing kits ?
Labor – Type I ?
Labor – Type II ?
Indirect materials Value
Manufacturing supplies Value
Value
Value
Value
Value
Current Designs
Manufacturing Budget
Rotomolded Line
For the Year Ended December 31, 2017
Units to be produced
Calculations
Maintenance and utilities Value
Total variable costs ?
Fixed costs
Supervision Value
Insurance Value
Depreciation Value
Total fixed costs ?
Total costs ?
(b) Prepare the flexible budget for manufacturing for the quarter ended March 31, 2017. Assume
activity levels of 900, 1,000 and 1,050 units.
Units to be produced 900 kayaks 1,000 kayaks 1,050 kayaks
Costs:
Variable costs
Polyethylene powder ? ? ?
Finishing kits ? ? ?
Labor -Type I ? ? ?
Labor – Type II ? ? ?
Indirect materials ? ? ?
Manufacturing supplies ? ? ?
Maintenance & utilities ? ? ?
Total variable costs ? ? ?
Fixed costs
Supervision (a) ? ? ?
Insurance (b) ? ? ?
Depreciation © ? ? ?
Total fixed costs ? ? ?
Total costs ? ? ?
(c)
Assuming the rotomolded line is treated as a profit center, prepare a flexible budget report for
manufacturing for the quarter ended March 31, 2017, when 1,050 units were produced.
Difference
Budget Actual costs F = favorable
Production in units
1,050 kayaks
1,050 kayaks U = unfavorable
Costs:
Variable costs
Polyethylene powder ? ? ?
Finishing kits ? ? ?
Labor -Type I ? ? ?
Manufacturing Flexible Budget Report
For the Quarter Ended March 31, 2017
Current Designs
Rotomolded Line
Manufacturing Flexible Budget Report
For the Quarter Ended March 31, 2017
Current Designs
Rotomolded Line
Labor -Type II ? ? ?
Indirect materials ? ? ?
Manufacturing supplies ? ? ?
Maintenance & utilities ? ? ?
Total variable costs ? ? ?
Fixed costs
Supervision ? ? ?
Insurance ? ? ?
Depreciation ? ? ?
Total fixed costs ? ? ?
Total costs ? ? ?
After you have completed CD24 consider the following additional questions.
1. Assume that the activity levels in the flexible budget for the quarter ended March 31, 2017
changed to 900, 1,000 and 1,200 in part (b). Show the impact of this change on the flexible budget.
2. Assuming the rotomolded line is treated as a profit center, revise the flexible budget report for
manufacturing for the quarter ended March 31, 2017, assuming 1,200 units were produced.
Assume that variable costs were 10% higher at this level of activity.
CD24 Solution
(a) Prepare the annual manufacturing budget for 2017, assuming that 4,000 kayaks will be produced.
4,000 Kayaks
Amount
Budgeted
Costs:
Variable cost
Polyethylene powder $324,000
Finishing kits $680,000
(b) Prepare the flexible budget for manufacturing for the quarter ended March 31, 2017. Assume
activity levels of 900, 1,000 and 1,050 units.
Production in units 900 kayaks 1,000 kayaks 1,050 kayaks
Costs:
Variable costs
Polyethylene powder $72,900 $81,000 $85,050
(54 x $1.50 per unit)
4,000 x 54 x $1.50
4,000 x $170
Current Designs
Rotomolded Line
Manufacturing Flexible Budget Report
For the Quarter Ended March 31, 2017
Current Designs
Rotomolded Line
Manufacturing Budget
For the Year Ended December 31, 2017
Units to be produced
Calculations
Indirect materials 9,000 10,000 10,500
($10 per unit (a))
Manufacturing supplies 12,105 13,450 14,123
($13.45 per unit (b))
(c) Assuming the rotomolded line is treated as a profit center, prepare a flexible budget report for
manufacturing for the quarter ended March 31, 2017, when 1,050 units were produced.
Difference
Units to be produced Budget Actual costs F = favorable
1,050 kayaks
1,050 kayaks U = unfavorable
Costs:
Variable costs
Polyethylene powder $85,050 $87,000 ($1,950) U
Finishing kits 178,500 178,840 (340) U
For the Quarter Ended March 31, 2017
Current Designs
Rotomolded Line
Manufacturing Flexible Budget Report
CD24 Solution to additional question
1. Assume that the activity levels in the flexible budget for the quarter ended March 31, 2017
changed to 900, 1,000 and 1,200 in part (b). Show the impact of this change on the flexible budget.
2. Assuming the rotomolded line is treated as a profit center, revise the flexible budget report for
manufacturing for the quarter ended March 31, 2017, assuming 1,200 units were produced.
Assume variable costs were 10% higher at this level of activity.
(a) Prepare the annual manufacturing budget for 2017, assuming that 4,000 kayaks will be produced.
4,000 Kayaks
Amount
Budgeted
Costs:
Variable cost
Polyethylene powder $324,000
Finishing kits $680,000
Labor – Type I $120,000
(b) Prepare the flexible budget for manufacturing for the quarter ended March 31, 2017. Assume
activity levels of 900, 1,000 and 1,200 units.
Production in units 900 kayaks 1,000 kayaks 1,200 kayaks
Costs:
Current Designs
Rotomolded Line
Manufacturing Budget
For the Year Ended December 31, 2017
Production in units
Calculations
4,000 x 54 x $1.50
4,000 x $170
4,000 x 2 x $15
Current Designs
Rotomolded Line
Manufacturing Flexible Budget Report
For the Quarter Ended March 31, 2017
4,000 x 3 x $12
($170 per unit)
Labor -Type I 27,000 30,000 36,000
(2 hrs./unit x $15/hr.)
Labor – Type II 32,400 36,000 43,200
Fixed costs
Supervision (d) 22,500 22,500 22,500
Difference
Units to be produced Budget Actual costs F = favorable
1,200 kayaks 1,200 kayaks U = unfavorable
Costs:
Variable costs
Polyethylene powder $97,200 $95,700 $1,500 F
Finishing kits 204,000 196,724 7,276 F
Labor -Type I 36,000 34,650 1,350 F
For the Quarter Ended March 31, 2017
Current Designs
Rotomolded Line
Manufacturing Flexible Budget Report
Depreciation 27,450 27,450 0