Gilman Company
Machining Department
Monthly Production Budget
Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450,000
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $564,000
The actual amount spent and the actual units produced in the first three months of 2014
in the Machining Department were as follows:
Amount Spent Units Produced
January $450,000 90,000
February 492,000 100,000
March 540,000 110,000
The Machining Department supervisor has been very pleased with this performance, since actual expenditures have been less than the monthly budget. 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 $1.80
Direct labor hours per unit 0.25
Planned monthly unit production 120,000
a. Prepare a flexible budget for the actual units produced for January, February, and March 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?
Answer:
a. GILMAN COMPANY—MACHINING DEPARTMENT
Flexible Production Budget
For the Three Months Ending March 31, 2014
January February March
Units of production 90,000 100,000 110,000
Wages $337,500 $375,000 $412,500
Utilities 40,500 45,000 49,500
Depreciation 60,000 60,000 60,000
Total $438,000 $480,000 $522,000
Supporting calculations:
Units of production 90,000 100,000 110,000
Hours per unit × 0.25 × 0.25 × 0.25
Total hours of production 22,500 25,000 27,500
Wages per hour × $15.00 × $15.00 × $15.00
Total wages $337,500 $375,000 $412,500
Total hours of production 22,500 25,000 27,500
Utility costs per hour × $1.80 × $1.80 × $1.80
Total utilities $40,500 $45,000 $49,500
Depreciation is a fixed cost, so it does not “flex” with changes in production. Since it
is the only fixed cost, the variable and fixed costs are not classified in the budget.
b. January February March
Total flexible budget…………………………………… $438,000 $480,000 $522,000
Actual cost……………………………………………… 450,000 492,000 540,000
Excess of actual cost over budget…………………… $ (12,000) $ (12,000) $ (18,000)
The excess of actual cost over the flexible budget suggests that the Machining Department has not performed as well as originally thought. The department is spending more than would be expected. The flexible budget is a superior budgeting approach in this situation, since wages and utility costs vary with production. Thus, the budget for these costs should adjust (flex) to the actual level of production. Actual costs can rightfully be compared to the flexible budget, because both numbers are based on actual volumes.