BUDGETARY CONTROL

Ex. 1
Fagan Company uses a flexible budget for manufacturing overhead based on machine hours. Variable
manufacturing overhead costs per machine hour are as follows:
Indirect labor $5.00
Indirect materials 2.50
Maintenance .50
Utilities .30
Fixed overhead costs per month are:
Supervision $600
Insurance 200
Property taxes 300
Depreciation 900
The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month.
During the month of August, 2008, the company incurs the following manufacturing overhead costs:
Indirect labor $14,000
Indirect materials 8,100
Maintenance 1,400
Utilities 950
Supervision 720
Insurance 200
Property taxes 300
Depreciation 930

Instructions
Prepare a flexible budget report, assuming that the company used 3,000 machine hours during August.

Ex. 2
Molle Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be
from $200,000 to $240,000. Variable costs and their percentage relationships to sales are:

Sales commissions 6%
Advertising 4%
Traveling 5%
Delivery 1%

Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment
$10,000.The actual selling expenses incurred in February, 2008, by Molle Company are as follows:

Sales commissions $13,700

Advertising 8,000
Traveling 11,300
Delivery 1,600

Fixed selling expenses consist of sales salaries $41,000 and depreciation on delivery equipment $10,000.

Instructions
Prepare a flexible budget performance report, assuming that February sales were $220,000.
Ex. 3
Pele Clothing Company's static budget at 2,000 units of production includes $8,000 for direct labor,
$2,000 for utilities (variable), and total fixed costs of $16,000. Actual production and sales for the year
was 6,000 units, with an actual cost of $47,200.

Instructions
Determine if Pele Clothing is over or under budget.

Ex. 4
Data concerning manufacturing overhead for Friendly Company are presented below. The Mixing
Department is a cost center.

An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the
Mixing Department and that 50% of supervisory costs are controllable at the department level.

The flexible budget formula and the cost and activity for the months of July and August are as follows:
Flexible Budget Per
Direct Labor Hour Actual Costs and Activity
July August
Direct labor hours 6,000 7,000
Overhead costs
Variable
Indirect materials $3.50 $ 20,500 $ 25,100
Indirect labor 6.00 39,500 40,700
Factory supplies 1.00 7,600 8,200
Fixed
Depreciation $20,000 15,000 15,000
Supervision 25,000 23,000 26,000
Property taxes 10,000 12,000 12,000
Total costs $117,600 $127,000

Instructions
(a) Prepare the responsibility reports for the Mixing Department for each month.
(b) Comment on the manager's performance in controlling costs during the two month period.