Question

Activity-Based Flexible Budgeting Foy Company has a welding activity and wants to develop a flexible budget formula for the activity. The following resources are used by the activity: • Four welding units, with a lease cost of $13,000 per year per unit Six welding employees each paid a salary of $57,000 per year (A total of 12,000 welding hours are supplied by the six workers.) • Welding supplies: $400 per job • Welding hours: 4 hours used per job During the year, the activity operated at 90 percent of capacity and incurred the following actual activity and resource costs. • Lease cost: $52,000 • Salaries: $359,100 • Parts and supplies: $1,074,300 Required:

Answer 1

Solution:-

1. Flexible Budget Formula:

Welding cost = $ 394,000 + $ 100 X.

Computation of total fixed cost per year :

Lease Cost of Welding Units ( $ 13,000 x 4)	$ 52,000
Salary of Welding Employees ( $ 57,000 x 6)	342,000
Total Fixed Cost	$ 394,000

Variable cost per hour = $ 400 / 4 hours = $ 100q,

q is the number of welding hours used.

2.

Foy Company Activity Based Performance Report For the year ended.....
	Actual Cost	Budgeted Cost	Budget Variance
Fixed Cost	$ 411,100	$ 394,000	$ 17,100 U
Variable Cost	1,074,300	1,080,000 *	$ 5,700 F

Budgeted variable cost = 12,000 hours x 0.90 x $ 100 per hour = $ 1,080,000.

3. The only fixed cost per year would be the lease cost of $ 52,000.

Variable cost per welding hour would comprise of cost of supplies, i.e. $ 100, and the cost of outsourcing welders per hour of $ 30.

Welding Cost = $ 52,000 + $ 130X