Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 54

Flexible Budgets with ABC The Cameron Corporation uses an ABC system, with the following manufacturing support (i.e., factory overhead) costs:

Unit-level support costs:
Electricity	$1.00 per machine hour
Maintenance labor	$1.50 per machine hour
Batch-level support costs:
Production set-ups	$300 per setup
Incoming Inspection	$100 per purchase order
Product-level support costs:
Engineering support	$2,000 per engineering change order (ECO)
Facilities-level support costs:
Depreciation—plant	$15,000 per month
Insurance and property taxes	$5,000 per month

The plant manager has asked you to prepare flexible (control) budgets for three levels of possible activity for the coming month: 4,000 machine hours, 5,000 machine hours, and 6,000 machine hours. Associated activity levels for manufacturing support costs are as follows:

	Level of Output (MH)
	4,000	5,000	6,000
Production setups	20	24	28
Purchase orders	10	15	20
ECOs	12	15	18

Required

1. Use an Excel spreadsheet to prepare a flexible (control) budget for the following three output levels: (a) 4,000 machine hours, (b) 5,000 machine hours, and (c) 6,000 machine hours.

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2. How do these flexible budgets differ from those prepared under a traditional approach (e.g., for the case where a single activity measure, machine hours, is used to construct the flexible (control) budget)?

Step 1 of 7

Budget is a statement prepared by the management of the business entity which helps them to estimate the expenses, income, receipts, payment, sales and purchases during the period. It is prepared keeping in mind the companies objectives and abilities with respect to resources they have. Often businesses deviate from their budgeted figures either in favourable way or unfavourable way. Such deviations are commonly referred to as variances.