BUDGETARY CONTROL

Beal Manufacturing Co.s static budget at 12,000 units of production includes $72,000 for
direct labor and $12,000 for direct materials. Total fixed costs are $48,000.
Instructions
a. Determine how much would appear on Beals flexible budget for 2016 if 18,000 units are
produced and sold.
b. How would this comparison differ if a static budget were used instead of a flexible budget
for performance evaluation?
Solution
a.

12,000 Units

Variable costs:
Direct labor
Direct materials
Fixed costs
Total costs
b.

$72,000
12,000
84,000
48,000
$132,000

Unit Variable Cost

$6.00
1.00

18,000 Units
$108,000
18,000
126,000
48,000
$174,000

If a static budget were used, budgeted variable costs would be only $84,000 because
they would be based on the static budget level of 12,000 units. The company would
appear way over budget since the costs incurred would be related to a higher level of
activity.

Cody Co. developed its annual manufacturing overhead budget for its master budget for 2016
as follows:
Expected annual operating capacity
Variable overhead costs
Indirect labor
Indirect materials
Factory supplies
Total variable
Fixed overhead costs
Depreciation
Supervision
Property taxes
Total fixed
Total costs

120,000 Direct Labor Hours

$600,000
120,000
60,000
780,000
240,000
120,000
96,000
456,000
$1,236,000

The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct
labor hours.
Instructions
Prepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution
CODY CO.
Monthly Flexible Manufacturing Overhead Budget
Activity level
Direct labor hours
Variable costs
Indirect labor
Indirect materials
Factory supplies
Total variable
Fixed costs
Depreciation
Supervision
Property taxes
Total fixed
Total costs

8,000

9,000

$40,000
8,000
4,000
52,000

$45,000
9,000
4,500
58,500

20,000
10,000
8,000
38,000
$90,000

20,000
10,000
8,000
38,000
$96,500