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

LEI COMPANY

Machining Department

Monthly Production Budget

Wages ......................... $1,440,000

Utilities ............................. 92,000

Deprecation ........................ 32,500

Total .......................... $1,564,500

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

_______________Amount Spent __________________ Units Products

January ............. $1,200,000 .................................. 75,000

February ............ 1,356,000 ................................... 85,000

March ................ 1,425,000 ................................... 90,000

The Machining Department supervisor has been very pleased with this performance, since actual expenditures have been less than the monthly budget. 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.................................. $18.00

Utility cost per direct labor hour .................$1.15

Direct labor hours per unit ................... 0.80 hrs.

Planned unit production.................. 100,000 units

a. Prepare a flexible budget for the actual units produced for January, February, and March 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?