Fernetti Company uses budgets in controlling costs. The May 2010 budget report for the company’s Packaging Department is as follows.

The monthly budget amounts in the report were based on an expected production of 50,000 units per month or 600,000 units per year.

The company president was displeased with the department manager’s performance. The department manager, who thought he had done a good job, could not understand the unfavorable results. In May, 55,000 units were produced.

Instructions

(a) State the total budgeted cost formula.

(b) Prepare a budget report for May using flexible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget data?

(c) In June, 40,000 units were produced. Prepare the budget report using flexible budget data, assuming

(1) Each variable cost was 20% less in June than its actual cost in May, and (2) fixed costs were the same in the month of June as in May.

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FERNETTI COMPANY Budget Report Packaging Department For the Month Ended May 31, 2010 Difference Favorable F Manufacturing Costs Budget Actual Unfavorable U Variable costs $ 41,000 47,000 15,200 13,000 9,600 5,200 $ 40,000 $1,000 U 2,000 U Direct materials Direct labor 45,000 Indirect materials 15,000 200 U Indirect labor 12,500 500 U Utilities 10,000 400 F Maintenance 5,000 200 U Total variable 127,500 131,000 3,500 U Fixed costs Rent 10,000 10,000 7,000 5,000 -0- Supervision Depreciation 7,000 5,000 Total fixed 22,000 22,000 -0- $149,500 $153,000 $3,500 U Total costs