The production supervisor of the Machining Department for Hagerstown Company agreed to the following monthly static budget for the upcoming year:

The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows:

The Machining Department supervisor has been very pleased with this performance because actual expenditures for May–July have been significantly less than the monthly static budget of $2,358,000. However, the plant manager believes that the budget should not remain fixed for every month but should “flex” or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows:

Wages per hour...................................................................................$25.00

Utility cost per direct labor hour.......................................................$0.80

Direct labor hours per unit.................................................................1.5

Planned monthly unit production...................................................60,000

a. Prepare a flexible budget for the actual units produced for May, June, and July in the Machining Department. Assume depreciation is a fixed cost.

b. Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?

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Hagerstown Company Machining Department Monthly Production Budget Wages. $2,250,000 72,000 Utilities. 36,000 $2,358,000 Depreciation. Total Amount Spent Units Produced May June $1,600,000 1,950,000 40,000 48,000 July 2,200,000 52,000