1. Question One

Gordon Brown, the comptroller for Eastend Inc., prepared the following budget for manufacturing costs at two different levels of activity for 2020:

DIRECT LABOUR HOURS

Level of Activity

50,000 100,000

Direct Materials $300,000 $600,000

Direct Labour 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 2019, Eastend employees worked a total of 80,000 direct labour 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 labour 355,000

Depreciation 100,000

Maintenance 425,000

Machining 142,000

Materials handling 232,500

Inspecting products 160,000

Eastend applies overhead using rates based on direct labour 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:

1.Prepare a performance report for Eastend's manufacturing costs in 2020.

2. Assume that one of the products produced by Eastend is budgeted to use 10,000 direct labour 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.

3.One of Eastend's managers said the following: "Budgeting at the activity level makes a lot of sense. It helps us manage costs better. But this budget needs to provide more detailed information. For example, I know that the materials handling activity involve the usage of forklifts and operators, and this information is lost by 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, we need up to eight operators for our two shifts 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."

4. Based on these comments, explain how this additional information may help Eastend 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 3.