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

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 CostBudget     Actual          Unfavorable U    

Variable costs          

  Direct materials  $48,000  $47,000          $1,000F    

  Direct labor           54,000    51,200           2,800F    

  Indirect materials   24,000   24,200              200     U    

  Indirect labor    18,000    17,500              500F    

  Utilities             15,000   14,900              100F    

  Maintenance    12,000   12,400             400U    

    Total variable   171,000        167,200          3,800F    

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       $3,800F    

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?

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 CostFlexible     Actual          Unfavorable U    

Variable costs          

  Direct materials  $46,400    $47,000            $600U    

  Direct labor           52,200    51,200            1,000F    

  Indirect materials   23,200   24,200            1,000     U    

  Indirect labor    17,400    17,500               100U    

  Utilities            14,500   14,900              400U    

  Maintenance    11,600   12,400                       800U    

    Total variable        165,300        167,200           1,900U    

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       $1,900U

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)

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answer; risk transference;