Static Budget vs. Flexible Budget

The production supervisor of the Machining Department for Nell Company agreed to the following monthly static budget for the upcoming year:

Nell Company Machining Department Monthly Production Budget
Wages	$1,283,000
Utilities	58,000
Depreciation	98,000
Total	$1,439,000

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	$1,355,000		107,000
February	1,299,000		98,000
March	1,232,000		88,000

The Machining Department supervisor has been very pleased with this performance, since actual expenditures have been less than the monthly budget. 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	$22
Utility cost per direct labor hour	$1
Direct labor hours per unit	0.5
Planned monthly unit production	117,000

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. Enter all amounts as positive numbers. If required, use per unit amounts carried out to two decimal places.

Nell Company-Machining Department
Flexible Production Budget
For the Three Months Ending March 31, 2016
	January	February	March
Units of production
Wages	$	$	$
Utilities
Depreciation
Total	$	$	$

b. Compare the flexible budget with the actual expenditures for the first three months.

	January	February	March
Total flexible budget	$	$	$
Actual cost
Excess of actual cost over budget	$	$	$

What does this comparison suggest?

The Machining Department has performed better than originally thought.
The department is spending more than would be expected.