Johnson Electrical produces industrial ventilation fans. The company plans to manufacture 87,000 fans evenly over the next quarter at the following costs: direct material, $1,914,000; direct labor, $435,000; variable manufacturing overhead, $639,450; and fixed manufacturing overhead, $966,000.

Johnson Electrical produces industrial ventilation fans. The company plans to manufacture 87,000 fans evenly over the next quarter at the following costs: direct material, $1,914,000; direct labor, $435,000; variable manufacturing overhead, $639,450; and fixed manufacturing overhead, $966,000. The $966,000 amount includes $84,000 of straight-line depreciation and $126,000 of supervisory salaries.

Shortly after the conclusion of the quarter’s first month, Johnson reported the following costs:

  

Direct material	$	619,700
Direct labor		134,400
Variable manufacturing overhead		217,000
Depreciation		28,000
Supervisory salaries		44,900
Other fixed manufacturing overhead		250,000
Total	$	1,294,000

  

Dave Kellerman and his crews turned out 26,000 fans during the month—a remarkable feat given that the firm’s manufacturing plant was closed for several days because of storm damage and flooding.

Kellerman was especially pleased with the fact that overall financial performance for the period was favorable when compared with the budget. His pleasure, however, was very short-lived, as Johnson’s general manager issued a stern warning that performance must improve, and improve quickly, if Kellerman had any hopes of keeping his job.

  

Required:

2.	Which of the two budgets would be more useful when planning the company’s cash needs over a range of activity?
	Flexible Budget

  

3.

Prepare a performance report that compares budgeted and actual costs for the period just ended (i.e., the report that Kellerman likely used when assessing his performance). (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Leave no cells blank, be sure to enter "0" if required. Input all amounts as positive values. Omit the "$" sign in your response.)

  

	Static Budget: 29,000 Units	Actual: 26,000 Units	Variance
Direct material used	$	$	$	Favorable
Direct labor				Favorable
Variable manufacturing overhead				Unfavorable
Depreciation				None
Supervisory salaries				Unfavorable
Other fixed manufacturing overhead				Favorable
Total	$	$	$	Favorable

  

4.

Prepare a performance report that compares budgeted and actual costs for the period just ended (i.e., the report that the general manager likely used when assessing Kellerman’s performance). (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Leave no cells blank, be sure to enter "0" if required. Input all amounts as positive values. Omit the "$" sign in your response.)

  

	Flexible Budget: 26,000 Units	Actual: 26,000 Units	Variance
Direct material used	$	$	$	Unfavorable
Direct labor				Unfavorable
Variable manufacturing overhead				Unfavorable
Depreciation				None
Supervisory salaries				Unfavorable
Other fixed manufacturing overhead				Favorable
Total	$	$	$	Unfavorable

  

5-a.	Which of the following two reports is preferred?
	A performance report based on flexible budgeting.

  

5-b.	Which of the following statements is false?
	Kellerman's assessment regarding the favorable overall performance for the period is correct.

Explanation: 2.

Given the focus on a range of activity, a flexible budget would be more useful because it incorporates several different activity levels.

 
3.

Static budget vs. actual experience:

Calculations:

Direct material used:  $1,914,000 ÷ 87,000 units = $22 per unit

Direct labor:  $435,000 ÷ 87,000 units = $5 per unit

Variable manufacturing overhead:  $639,450 ÷ 87,000 units = $7.35 per unit

Depreciation:  $84,000 ÷ 3 months = $28,000 per month

Supervisory salaries:  $126,000 ÷ 3 months = $42,000 per month

Other fixed manufacturing overhead:  ($966,000 – $84,000 – $126,000) ÷ 3 months = $252,000 per month

5.

A performance report based on flexible budgeting is preferred. The report compares budgeted and actual performance at the same volume level, eliminating any variations in activity. In essence, everything is placed on a “level playing field.”

The general manager’s warning is appropriate because of the sizable variances that have arisen. With the static budget, performance appears favorable, especially with respect to variable costs. Bear in mind, though, that volume was below the original monthly expectation of 29,000 units, presumably because of the plant closure. A reduced volume will likely lead to lower variable costs than anticipated (and resulting favorable variances).

When the volume differential is removed, variable cost variances total $78,000U ($47,700U + $4,400U + $25,900U), or 8.73% of budgeted variable costs ($572,000 + $130,000 + $191,100). Variable cost incurrence appears excessive with respect to all components of the total: direct material, direct labor, and variable manufacturing overhead.