Question

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 $11,000 per year per unit • Six welding employees each paid a salary of $47,000 per year (A total of 9.000 welding hours are supplied by the six workers.) • Welding supplies: $300 per job • Welding hours: 3 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: S44,000 Salaries: $296,100 • Parts and supplies: $805,300 Required: 1. Prepare a flexible budget formula for the welding activity using welding hours as the driver. Welding cost = х 2. Prepare a performance report for the welding activity. In the last column of Foy Company Activity-Based Performance Report, if variance amount is unfavorable select "U", select "F", if it is Favorable and select "NA" if there is no variance. Foy Company Activity-Based Performance Report Actual Cost Budgeted Cost (90% level) Budget Variance Variance Activity Welding U NA Fixed cost Variable cost 11 00 3. What if welders were hired through outsourcing and paid $30 per hour (the welding equipment is provided by Foy)? Repeat Requirement 1 for the outsourcing case. Welding cost +

Answer 1

Answer 1:

Welding cost = $326,000 + $100 X

Explanation:

Fixed costs = Total lease cost + Total employees salaries

= ($11,000 * 4 units) + ($47,000 * 6 employees) = $326,000

Variable cost per unit = Welding supplies per job / Welding hours per job

= $300 / 3 = $100 per hr

Welding cost = Fixed costs + Variable cost per unit = $326,000 + $100 X

Answer 2.

Foy Company
Activity-Based Performance Report

	Actual Cost	Budgeted Cost (90% level)	Budget Variance	Variance
Welding :
Fixed cost	$340,100 [Note 1]	$326,000	$14,100	U
Variable cost	805,300	810,000 [Note 2]	$4,700	F

Note 1 : Actual fixed cost = Actual lease cost + Actual salaries = $44,000 + $296,100 = $340,100

Note 2: Budgeted variable cost = Budgeted total welding hours * Variable cost per hour * 90 %

= 9,000 welding hours * $100 per hr * 90 % = $810,000

Answer 3.

Welding cost = $44,000 + $130 X

Explanation:

If the company outsoure welders, then fixed cost on salaries will be saved & the only fixed cost the company will incur is the total lease cost of $44,000 . Since outsourcing welders are paid $30 per hour , the variable cost per unit will increase by $ 30 & the new variable cost will be $130X.