Cornerstone Exercise 12.4 (Algorithmic)

Activity-Based Flexible Budgeting

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 $14,000 per year per unit
• Six welding employees each paid a salary of $51,000 per year (A total of 12,000 welding hours are supplied by the six workers.)
• Welding supplies: $400 per job
• Welding hours: 4 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: $56,000
• Salaries: $321,300
• Parts and supplies: $1,074,900

Required:

1.Please prepare flexible budget formula for the welding activity using welding hours as the driver.

Welding cost=$+$X

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1.Activity flexible budgeting is the prediction of what activity costs will be as activity output changes.

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2.Can you prepare a performance report for the welding activity. In the last column of Foy Company Activity-Based Performance Report, if variance amount is unfavorable enter "U" , enter "F", if it is Favorable and enter "NA" if there is no variance.

Foy Company

Activity-Based Performance Report

Activity

Actual Cost

Budgeted Cost (90% level)

Budget Variance

Variance

Welding:

Fixed cost

$

$

$

Variable cost

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2.A performance report shows actual cost, budgeted cost, and budget variance (favorable or unfavorable) for fixed cost and variable cost.

3.What ifwelders 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=$+$X

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3.See Cornerstone 12.4.