Problerm:
ACTIVITY FLEXIBLE BUDGETING, NON-VALUE-ADDED COSTS
Douglas Davis, controller for Marston, Inc., prepared the following budget for manufacturing costs at two different levels of activity for 2007:
|
Level of Activity
|
|
|
Driver: Direct Labor Hours
|
50,000
|
100,000
|
|
Direct materials
|
$ 300,000
|
$ 600,000
|
|
Direct labor
|
200,000
|
400,000
|
|
Depreciation (plant)
|
100,000
|
100,000
|
|
Subtotal
|
$ 600,000
|
$1,100,000
|
|
Driver: Machine Hours
|
200,000
|
300,000
|
|
Maintaining equipment
|
$ 360,000
|
$ 510,000
|
|
Machining
|
112,000
|
162,000
|
|
Subtotal
|
$ 472,000
|
$ 672,000
|
|
Driver: Material Moves
|
20,000
|
40,000
|
|
Moving materials
|
$ 165,000
|
$ 290,000
|
|
Driver: Number of Batches Inspected
|
100
|
200
|
|
Inspecting products
|
$ 125,000
|
$ 225,000
|
|
Total
|
$1,362,000
|
$2,287,000
|
During 2007, Marston 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:
|
Direct materials
|
$440,000
|
|
Direct labor
|
355,000
|
|
Depreciation
|
100,000
|
|
Maintaining equipment
|
425,000
|
|
Machining
|
142,000
|
|
Moving materials
|
232,500
|
|
Inspecting products
|
160,000
|
Marston applies overhead using rates based on direct labor hours, machine hours, number of moves, and number of batches. The second level of activity (the 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 Marston's manufacturing costs in 2007.
2. Assume that one of the products produced by Marston is budgeted to use 10,000 direct labor hours, 15,000 machine hours, and 500 moves and will be produced in five batches. A total of 10,000 units will be produced during the year. Calculate the budgeted unit manufacturing cost.
3. One of Marston's managers said the following: "Budgeting at the activity level makes a lot of sense. It really helps us manage costs better. But the previous budget really needs to provide more detailed information. For example, I know that the moving materials activity involves the use of forklifts and operators, and this information is lost when only the total cost of the activity for various levels of output is reported. We have four forklifts, each capable of providing 10,000 moves per year. We lease these forklifts for five years, at $10,000 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. Also, I know that fuel costs about $0.25 per move."
Assuming that these are the only three items, expand the detail of the flexible budget for moving materials to reveal the cost of these three resource items for 20,000 moves and 40,000 moves, respectively. Based on these comments, explain how this additional information can help Marston better manage its costs. (Especially consider how activity-based budgeting may provide useful information for non-value-added activities.)