Department A is one of 15 departments in the plant and is involved in the production of all of the six products manufactured. The department is highly mechanized and as a result its output is measured in direct machine hours. Variable (flexible) budgets are utilized throughout the factory in planning and controlling costs, but here the focus is upon the application of variable budgets only in Department A. The following data covering a time span of approximately six months were taken from the various budgets, accounting records and performance reports (only representative items and amounts are utilized here):

On March 15, 20X5, the following variable budget was approved for the department; it will be used throughout the 20 X6 fiscal year which begins July \(1,20 X 5\). This variable budget was developed through the cooperative efforts of the department manager, his supervisor and certain staff members from the budget department.

On May 5, 20X5, the annual sales plan and the production budget were completed. In order to continue preparation of the annual profit plan (which was detailed by month) the production budget was translated to planned activity for each of the factory departments. The planned activity for Department A was:

On August 31, 20X5, the manager of Department A was informed that his planned output for September had been revised to 34,000 direct machine hours. He expressed some doubt as to whether this volume could be attained.
At the end of September 20X5 the accounting records provided the following actual data for the month for the department:

{Required:}
The requirements relate primarily to the potential users of the variable budget for the period March through September 20X5.

(a) What activity base is utilized as a measure of volume in the budget for this department? How should one determine the range of the activity base to which the variable rates per direct machine hour are relevant? Explain.

(b) The high-low point method was utilized in developing this variable budget. Using indirect wage costs as an example, illustrate and explain how this method would be applied in determining the fixed and variable components of indirect wage costs for this department. Assume that the high-low budget values for indirect wages are \(\$ 19,400\) at 20,000 direct machine hours and \(\$ 20,100\) at 30,000 direct machine hours.

(c) Explain and illustrate how the variable budget should be utilized:
(1) In budgeting costs when the annual sales plan and production budget are completed (about May 5, \(20 \mathrm{X} 5\) or shortly thereafter).
(2) In budgeting a cost revision based upon a revised production budget (about August \(31,20 X 5\) or shortly thereafter).
(3) In preparing a cost performance report for September \(20 X 5\).

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20X6 Variable Budget-Department A Fixed Amount Variable Rate Controllable Costs Employee salaries... per Month $9,000 per Direct Machine Indirect wages......... 18,000 $.07 Indirect materials. .09 Other costs.. 6,000 .03 $33,000 $.19