1

BUDGETARY CONTROL

Beal Manufacturing Co.’s static budget at 12,000 units of production includes $72,000 for direct labor and $12,000 for direct materials. Total fixed costs are $48,000.

Instructions a. Determine how much would appear on Beal’s flexible budget for 2016 if 18,000 units are

produced and sold. b. How would this comparison differ if a static budget were used instead of a flexible budget

for performance evaluation?

Solution

a. 12,000 Units Unit Variable Cost 18,000 Units Variable costs: Direct labor $72,000 $6.00 $108,000 Direct materials 12,000 1.00 18,000 84,000 126,000 Fixed costs 48,000 48,000 Total costs $132,000 $174,000 b. If a static budget were used, budgeted variable costs would be only $84,000 because

they would be based on the static budget level of 12,000 units. The company would appear way over budget since the costs incurred would be related to a higher level of activity.

2

Cody Co. developed its annual manufacturing overhead budget for its master budget for 2016 as follows:

Expected annual operating capacity 120,000 Direct Labor Hours Variable overhead costs Indirect labor $600,000 Indirect materials 120,000 Factory supplies 60,000 Total variable 780,000 Fixed overhead costs Depreciation 240,000 Supervision 120,000 Property taxes 96,000 Total fixed 456,000 Total costs $1,236,000 The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct labor hours.

Instructions Prepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem

Solving, IMA: Reporting

Solution

CODY CO. Monthly Flexible Manufacturing Overhead Budget

Activity level Direct labor hours 8,000 9,000 Variable costs Indirect labor $40,000 $45,000 Indirect materials 8,000 9,000 Factory supplies 4,000 4,500 Total variable 52,000 58,500 Fixed costs Depreciation 20,000 20,000 Supervision 10,000 10,000 Property taxes 8,000 8,000 Total fixed 38,000 38,000 Total costs $90,000 $96,500