Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger

Exercise 5

Activity Flexible Budgeting
Billy Adams, controller for Westcott Inc., prepared the following budget for manufacturing costs at two different levels of activity for the year:

During the year, Westcott employees worked a total of 80,000 direct labor hours, used 250,000 machine hours, made 32,000 moves, and performed 120 batch inspections. The following actual costs were incurred:

Westcott applies overhead using rates based on direct labor hours, machine hours, number of moves, and number of batches. The second level of activity (the far right column in the preceding table) is the practical level of activity (the available activity for resources acquired in advance of usage) and is used to compute predetermined overhead pool rates.
Required:
1. Prepare a performance report for Westcott's manufacturing costs for the year.
2. Assume that one of the products produced by Westcott is budgeted to use 10,000 direct labor hours, 15,000 machine hours, and 500 moves and will be produced in 5 batches. A total of 10,000 units will be produced during the year. Calculate the budgeted unit manufacturing cost (rounded to the nearest cent).
3. CONCEPTUAL CONNECTION One of Westcott's managers said: ''Budgeting at the activity level makes a lot of sense, but this budget needs to provide more detailed information. For example, the materials handling activity requires forklifts and operators, and this information is lost with simply reporting the total cost of the activity for various levels of output. We have four forklifts; each is rented for $10,000 per year and can provide 10,000 moves per year. Furthermore, for our two shifts, we need up to eight operators if we run all four forklifts. Each operator is paid a salary of $30,000 per year. Fuel costs us about $0.25 per move.''
Based on these comments, explain how this additional information may help Westcott to better manage its costs. Also, assuming that these are the only three items, expand the detail of the flexible budget for materials handling to reveal the cost of these three resource items for 20,000 moves and 40,000 moves, respectively. ( Note : You may wish to review the concepts of flexible, committed, and discretionary resources found in Chapter 3.)