Hardesty Company uses budgets in controlling costs. The May 2017 budget
report for the company’s Packaging Department is as follows.
Hardesty Company
Budget Report
Packaging Department
For the Month Ended May 31, 2017
Difference
Favorable F
Manufacturing Costs Budget Actual Unfavorable U
Variable costs
Direct materials $ 40,000 $ 41,000 $1,000 U
Direct labor 45,000 47,300 2,300 U
Indirect materials 15,000 15,200 200 U
Indirect labor 12,500 13,000 500 U
Utilities 10,000 9,600 400 F
Maintenance 7,500 8,000 500 U
Total variable 130,000 134,100 4,100 U
Fixed costs
Rent 10,000 10,000 –0–
Supervision 7,000 7,000 –0–
Depreciation 4,000 4,000 –0–
Total fi xed 21,000 21,000 –0–
Total costs $151,000 $155,100 $4,100 U
The monthly budget amounts in the report were based on an expected production of
50,000 units per month or 600,000 units per year.
The company president was displeased with the department manager’s performance.
The department manager, who thought he had done a good job, could not understand the
unfavorable results. In May, 55,000 units were produced.
Instructions
(a) State the total budgeted cost formula.
(b) Prepare a budget report for May using fl exible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget
data?
(c) In June, 40,000 units were produced. Prepare the budget report using fl exible budget
data, assuming (1) each variable cost was 20% less in June than its actual cost in May,
and (2) fi xed costs were the same in the month of June as in May.