Question

Johnson Electrical produces industrial ventilation fans. The company plans to manufacture 75,000 fans evenly over the next quarter at the following costs: direct material, $1,800,000; direct labor, $375,000; variable production overhead, $633,750; and fixed production overhead, $990,000. The $990,000 amount includes $90,000 of straight-line depreciation and $105,000 of supervisory salaries.

Shortly after the conclusion of the quarter’s first month, Johnson reported the following costs:

  

Direct material	$	578,500
Direct labor		114,600
Variable production overhead		215,000
Depreciation		30,000
Supervisory salaries		38,900
Other fixed production overhead		263,000
Total	$	1,240,000

Dave Kellerman and his crews turned out 22,000 fans during the month—a remarkable feat given that the firm’s manufacturing plant was closed for several days because of storm damage and flooding. Kellerman was especially pleased with the fact that overall financial performance for the period was favorable when compared with the budget. His pleasure, however, was very short-lived, as Johnson’s general manager issued a stern warning that performance must improve, and improve quickly, if Kellerman had any hopes of keeping his job.

  

Required:

2. Which of the two budgets would be more useful when planning the company’s cash needs over a range of activity?

3. Prepare a performance report that compares static budget and actual costs for the period just ended (i.e., the report that Kellerman likely used when assessing his performance).

4. Prepare a performance report that compares flexible budget and actual costs for the period just ended (i.e., the report that the general manager likely used when assessing Kellerman’s performance).

1. 5-a.Which of the following two reports is preferred?

2. 5-b.Which of the following statements is false?

Answer 1

2. Two budgets which will be useful in planning company's cash needs are production budget and sales budget. Alternatively a company can prepare cash flow budget also to understand its cash needs

3. Performance report - static budget vs actual costs

As per above analysis with static budget there is savings in Direct material and labor. overall savings is $26,250

4. Performance report - flexible budget vs actual costs

As per above analysis there is no savings in any Direct cost of fans produced. Overall cost is higher by $ 86,100. A Flexible budget gives accurate picture of the performance vs budget

Question No.5 is not fully given to answer.