Flights of Fancy Inc. is an Ontario based company that produces and sells honey and beeswax products. The company has its own hives that are located in the heart of the province. The three product lines include liquid honey, candles and soaps. In 2020, the senior management of the company decided to use the flexible budgeting system in order to implement strict controls over the costs of the business. The company used separate budgets for each of the three product lines. For the beeswax candles, the variable costs consist of direct materials $3.80 per candle, direct labour $1.80 per candle and variable manufacturing overhead $0.65 per candle. These rates are applicable for the production relevant range of 7,750 to 8,250 candles. For the same range, the fixed costs include depreciation $12,450 and insurance $3,845.

Instructions

(a) Using increments of 250 candles, prepare the flexible budget for the relevant range of activities for the beeswax candles product line. (6 marks)

(b) Under what circumstances may a static budget be an appropriate basis for evaluating a managers effectiveness in controlling costs? (2 marks)