Question

Venetian Company has two production departments, Fabricating and Assembling. At a department managers’ meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following.

1.		At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $50,000 in the Fabricating Department and $40,000 in the Assembling Department.
2.		At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $150,000 in the Fabricating Department, and $120,000 in the Assembling Department.

Prepare the flexible budget graph for the Fabricating Department, assuming the maximum direct labor hours in the relevant range is 100,000. Use increments of 10,000 direct labor hours on the horizontal axis and increments of $50,000 on the vertical axis.

Answer 1

Fabricating department: Total fixed cost = $50,000

Now at capacity of 50,000 DLH (direct labor hours) the total cost = 150,000. Of this $50,000 is fixed cost and so variable cost = $150,000-$50,000 = $100,000

Thus variable cost per DLH = $100,000/50,000 hours = $2 per DLH

Thus the cost equation will be: $50,000+$2x where x is the DLH. Using this equation we can prepare the cost table as shown below:

Activity (DLH)	Total cost	Fixed cost
0	50,000	50,000
10,000	70,000	50,000
20,000	90,000	50,000
30,000	110,000	50,000
40,000	130,000	50,000
50,000	150,000	50,000
60,000	170,000	50,000
70,000	190,000	50,000
80,000	210,000	50,000
90,000	230,000	50,000
100,000	250,000	50,000

Based on the above table the flexible budget graph for the Fabricating Department is provided below:

300,000 250,000 200,000 -Total cost 150,000 - Fixed cost 100,000 50,000 20,000 40,00o 60,000 80,000 100,000 120,000

In the above graph DLH is shown on the x axis and the cost is shown on the y axis