Static budget versus flexible budget OBJ. 2, 4 The production supervisor of the Machining Department for Rodriguez Company agreed to the following monthly static budget for the upcoming year:

Rodriguez Company Machining Department Monthly Production Budget Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $384,000 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $480,000 The actual amount spent and the actual units produced in the first three months of 2016 in the Machining Department were as follows:

Amount Spent Units Produced January $400,000 90,000 February 440,000 100,000 March 470,000 110,000 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 $480,000. 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 $16.00 Utility cost per direct labor hour $1.50 Direct labor hours per unit 0.20 Planned monthly unit production 120,000

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?