Cornerstone Exercise 12.4 (Algorithmic) Activity-Based Flexible Budgeting Foy Co
ID: 2518645 • Letter: C
Question
Cornerstone Exercise 12.4 (Algorithmic)
Activity-Based Flexible Budgeting
Foy Company has a welding activity and wants to develop a flexible budget formula for the activity. The following resources are used by the activity:
Four welding units, with a lease cost of $14,000 per year per unit
Six welding employees each paid a salary of $51,000 per year (A total of 12,000 welding hours are supplied by the six workers.)
Welding supplies: $400 per job
Welding hours: 4 hours used per job
During the year, the activity operated at 90 percent of capacity and incurred the following actual activity and resource costs.
Lease cost: $56,000
Salaries: $321,300
Parts and supplies: $1,074,900
Required:
1. Prepare a flexible budget formula for the welding activity using welding hours as the driver.
2. Prepare a performance report for the welding activity. In the last column of Foy Company Activity-Based Performance Report, if variance amount is unfavorable enter "U" , enter "F", if it is Favorable and enter "NA" if there is no variance.
Foy Company
Activity-Based Performance Report
Activity
Actual Cost
Budgeted Cost (90% level)
Budget Variance
Variance
Welding:
Fixed cost
$
$
$
Variable cost
3. What if welders were hired through outsourcing and paid $30 per hour (the welding equipment is provided by Foy)? Repeat Requirement 1 for the outsourcing case.
Welding cost = $ + $ XExplanation / Answer
1. The first step in the question is to find out the per hour rate of the Labour
Total Cost = Salary of a Labour per year X 6 = $51,000 X 6 = $306,000
Total Number of Hours = 12,000
Labour Cost per hour = $306,000 / 12,000 = $25.5/ hour
Therefore the flexible budget shall be made on the basis of jobs done (A job requires 4 hours of welding)
Fixed Lease Cost + [(Welding supplies per job + Welding labour cost per hour x 4) x Number of hours for total job
$56,000 + [($400 + $25.5x4) x Total hours / number of hours required by 1 job
$56,000 + [$502 x 12,000/4]
= $1,506,000
The company worked for 90% = 12,000 hours x 90% = 10,800 hours
Actual Labour cost = 321,300 Therefore the actual labour rate = 321,300 / 10,800 = $29.75/ hour
3. Then the answer would have been
Fixed Cost + [(welding supplies + labour cost per hour x 4 ) x number of total jobs hours
$56,000 + [(400 + 30x4) x 12,000/4
= $56,000 + [520 x 3000]
= $1,616,000
Activity Actual Budget 90% Budget Variance Variance Welding 1,074,900 1080,000 5100 F Fixed Cost $56,000 $56,000 0 0 Variable Cost $321,300 $275,400 $45,900 U