Question - Paragon Inc. normally manufactures between 36,000 and 42,000 units each month. A static budget based on 36,000 units and actual results for April follows:
Budget Actual
Direct materials $172,800 $175,900
Direct labor 270,000 258,000
Variable factory overhead 115,200 109,000
Supervision 105,000 82,600
Insurance & taxes 60,000 61,500
Depreciation 84,000 88,000
$807,000 $775,000
Conversations with Paragon's accountant revealed the following information:
April's production totaled 35,000 units.
Supervision, insurance and taxes, and depreciation are fixed costs.
Should production fall below 36,000 units, supervision costs are expected to be reduced by $20,000 because of temporary layoffs.
Instructions -
a. Prepare a flexible budget for 36,000, 39,000, and 42,000 units of activity.
b. Prepare a performance report for April that can be used to judge Paragon's success or failure in meeting budgeted targets. Comment on your findings.
c. Explain the flexibility that is associated with a flexible budget.