The Melcher Co. produces farm equipment at several plants. The business is seasonal and cyclical in nature. The company has attempted to use budgeting for planning and controlling activities, but the variable nature of the business has caused some company officials to be skeptical about the usefulness of budgeting to the company. The accountant for the Adrian plant has been using a system he calls "flexible budgeting" to help his plant management control operations.

The company president asks him to explain what the term means, how he applies the system at the Adrian plant and how it can be applied to the company as a whole. The accountant presents the following data as part of his explanation:

Required:

(a) Prepare a budget for January.

(b) Prepare a report for January comparing actual and budgeted costs for the actual activity for the month.

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6 lbs. @ $1.50 10,000 hours $9.00 per unit 2 hours @ $3.00 $6.00 per unit Budget data for 20X1 Normal monthly capacity of the plant in Direct labor hours Material costs Labor costs Overhead estimate at normal monthly capacity Variable (controllable): Indirect labor............ $ 6,650 Indirect materials.. 600 Repairs 750 Total variable. $8,000 Fixed (uncontrollable): Depreciation 3,250 Supervision 3,000 Total fixed $6,250 Total fixed and variable. $14,250