(Adapted from P10-3A) Ratchet Company uses budgets in controlling costs. The August 2017 budget report for the company's Assembling Department is as follows.

Ratchet Company

Budget Report

Assembling Department

For the month ended August 31, 2017

Manufacturing Costs

Budget

Actual

Difference

Favorable (F) or Unfavorable (U)?

Variable costs:

Direct materials

$145,300

$144,300

$1,000

F

Direct labor

151,300

148,500

2,800

F

Indirect materials

121,300

121,500

200

U

Indirect labor

115,300

114,800

500

F

Utilities

112,300

112,200

100

F

Maintenance

109,300

109,700

400

U

Total variable costs

754,800

751,000

3,800

F

Fixed costs:

Rent

109,300

109,300

0

Supervision

114,300

114,300

0

Depreciation

103,300

103,300

0

Total fixed costs

326,900

326,900

0

Total costs

$1,081,700

$1,077,900

$3,800

F

The monthly budget amounts in the report were based on the following:

Expected production:

1,073,000

units per month

Actual production:

1,068,000

units per month

The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August due to production being lower than expected.

a.

State the total monthly budgeted cost formula.

Total fixed cost of:

$326,900

+ variable cost per unit of:

$0.70

b.

Prepare a budget report for August using flexible budget data.

Manufacturing Costs

Budget

Actual

Difference

Favorable (F) or Unfavorable (U)?

Variable costs:

Direct materials

$144,622.93

$144,300

-$323

F

Direct labor

150,595

148,500

Indirect materials

120,735

121,500

Indirect labor

114,763

114,800

Utilities

111,777

112,200

Maintenance

108,791

109,700

Total variable costs

751,283

751,000

Fixed costs:

Rent

Supervision

Depreciation

Total fixed costs

Total costs

c.

Why does a flexible budget report like that prepared in part (b) provide a better basis for evaluating performance than the report based on static budget data?

d.

In September, actual production results were the following:

Actual production in September:

1,172,435

units per month

Prepare the budget report using flexible budget data, assuming (1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in September as in August.

Manufacturing Costs

Budget

Actual

Difference

Favorable (F) or Unfavorable (U)?

Variable costs:

Direct materials

Direct labor

Indirect materials

Indirect labor

Utilities

Maintenance

Total variable costs

Fixed costs:

Rent

Supervision

Depreciation

Total fixed costs

Total costs