Caroline Farr is manager of a production department of Helling Company. Her depa
ID: 2481220 • Letter: C
Question
Caroline Farr is manager of a production department of Helling Company. Her department makes one product; the following information for her department was accumulated for 2012:
Static Budget
Actual Results
Number of units
100,000
97,000
Direct materials cost
$800,000
$792,000
Direct labor cost
$400,000
$380,000
Variable manufacturing
overhead
$200,000
$199,000
Fixed manufacturing
overhead
$290,000
$292,000
Total
$1,690,000
$1,663,000
Required:
a) Prepare a flexible budget for the department's actual level of activity, 97,000 units.
b) Use the flexible budget to evaluate Ms. Farr's performance.
c) Why does the budget not include sales revenue and net income?
Static Budget
Actual Results
Number of units
100,000
97,000
Direct materials cost
$800,000
$792,000
Direct labor cost
$400,000
$380,000
Variable manufacturing
overhead
$200,000
$199,000
Fixed manufacturing
overhead
$290,000
$292,000
Total
$1,690,000
$1,663,000
Explanation / Answer
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. Here the flexible budget will be for the actual activity, ie., 97,000 units.
A.
Inorder to prepare the flexible budget, we first need to calculate the standard rates as follows:
The fixed costs won't change w.r.t change in production level.
Hence the flexible budget for the 97,000 units will be as follows:
B. Comparison
It can be seen that there are unfavorable variances in material cost and variable OH and favorable variance in labour cost. As a whole, the entity has not performed well resulting in an unfavorable variance of 15,000 when compared to the flexible budget.
C.
Here, Caroline Farr is manager of a production department. He is in charge of production and hence inorder to access the production department's performance, we need not include sales revenue and net income. These will be included to access the performance of sales and marketing dept.
Particulars Static Budget ($) Per Unit Costs ($) Number of units 1,00,000 Direct materials cost 8,00,000 8 Direct labor cost 4,00,000 4 Variable manufacturing OH 2,00,000 2