The production supervisor of the Machining Department for Niland Company agreed to the following monthly static budget for the upcoming year: Niland Company
Machining Department
Monthly Production Budget
Wages $1,125,000
Utilities 90,000
Depreciation 50,000
Total $1,265,000
The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows:
Amount Spent Units Produced
January $1,100,000 80,000
February 1,200,000 90,000
March 1,250,000 95,000
The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been less than the monthly static budget of $1,265,000. 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 $1.20
Direct labor hours per unit 0.75
Planned monthly unit production 100,000
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?
A. The Machining Department has performed better than originally thought.
B. The department is spending more than would be expected.