ACTIVITY FLEXIBLE BUDGETING Billy Adams, controller for Westcott, Inc., prepared the following budget for manufacturing costs at two different levels of activity for 2010:

DIRECT LABOR HOURS Level of Activity 50,000 100,000 Direct materials $300,000 $ 600,000 Direct labor 200,000 400,000 Depreciation (plant) 100,000 100,000 Subtotal $600,000 $1,100,000 MACHINE HOURS Level of Activity 200,000 300,000 Maintaining equipment $ 360,000 $ 510,000 Machining 112,000 162,000 Subtotal $ 472,000 $ 672,000 MATERIAL MOVES Level of Activity 20,000 40,000 Materials handling $165,000 $290,000 NUMBER OF BATCHES INSPECTED Level of Activity 100 200 Inspecting products $ 125,000 $ 225,000 Total $1,362,000 $2,287,000 During 2009, Westcott employees worked a total of 80,000 direct labor hours, used 250,000 machine hours, made 32,000 moves, and performed 120 batch inspections.

The following actual costs were incurred:

Direct materials $440,000 Direct labor 355,000 Depreciation 100,000 Maintenance 425,000 Machining 142,000 Materials handling 232,500 Inspecting products 160,000 Westcott applies overhead using rates based on direct labor hours, machine hours, number of moves, and number of batches. The second level of activity (the far right column in the preceding table) is the practical level of activity (the available activity for resources acquired in advance of usage) and is used to compute predetermined overhead pool rates.

Required:
. Prepare a performance report for Westcott’s manufacturing costs in 2010.
. Assume that one of the products produced by Westcott is budgeted to use 10,000 direct labor hours, 15,000 machine hours, and 500 moves and will be produced in five batches. A total of 10,000 units will be produced during the year. Calculate the budgeted unit manufacturing cost.
. One of Westcott’s managers said the following: ‘‘Budgeting at the activity level makes a lot of sense. It really helps us manage costs better. But this budget really needs to provide more detailed information. For example, I know that the materials handling activity involves the usage of forklifts and operators, and this information is lost with simply reporting the total cost of the activity for various levels of output.
We have four forklifts, each capable of providing 10,000 moves per year. We lease these forklifts for five years, at $10,000 per year. Furthermore, for our two shifts, we need up to eight operators if we run all four forklifts. Each operator is paid a salary of $30,000 per year. Also, I know that fuel costs us about $0.25 per move.’’
Based on these comments, explain how this additional information may help Westcott to better manage its costs. Also, assuming that these are the only three items, expand the detail of the flexible budget for materials handling to reveal the cost of these three resource items for 20,000 moves and 40,000 moves, respectively. You may wish to review the concepts of flexible, committed, and discretionary resources found in Chapter 14.
Problem