Just Bags produces leather purses. Just Bags has developed a static budget for the first quarter, which is based on 20,000 direct labour hours. During the quarter, the actual activity was 22,000 direct labour hours. Data for the first quarter are summarized as follows:
$\begin{array}{lrr}&\text { Static budget } & \text { Actual costs } \
&(20,000 \text { hours }) & (22,000 \text { hours })\
\text { Direct materials } & \$ 80,000 & \$ 87,000 \
\text { Direct labour } & 160,000 & 174,000 \
\text { Rent } & 48,000 & 50,000 \
\text { Total } & \$ 288,000 & \$ 311,000
\end{array}$
-Refer to the Figure.What is the flexible budget amount for the first quarter?
A)$261,000
B)$288,000
C)$311,000
D)$312,000

Question

Just Bags produces leather purses. Just Bags has developed a static budget for the first quarter, which is based on 20,000 direct labour hours. During the quarter, the actual activity was 22,000 direct labour hours. Data for the first quarter are summarized as follows:
 $\begin{array}{lrr}&\text { Static budget } & \text { Actual costs } \
&(20,000 \text { hours }) & (22,000 \text { hours })\
\text { Direct materials } & \$ 80,000 & \$ 87,000 \
\text { Direct labour } & 160,000 & 174,000 \
\text { Rent } & 48,000 & 50,000 \
\text { Total } & \$ 288,000 & \$ 311,000
\end{array}$
-Refer to the Figure.What is the flexible budget amount for the first quarter?
A)$261,000
B)$288,000
C)$311,000
D)$312,000

Quizplus · Accepted Answer

A flexible budget adjusts costs based on actual activity levels. Here, the original budget was based on 20,000 hours, but the actual activity was 22,000 hours, a 10% increase. Direct materials and labor are variable costs, so they increase with hours. Rent is a fixed cost and doesn't change with hours. The flexible budget for each category is:- Direct materials: $80,000 * (22,000 / 20,000) = $88,000- Direct labor: $160,000 * (22,000 / 20,000) = $176,000- Rent: $48,000 (unchanged because it's a fixed cost)Total flexible budget = $88,000 + $176,000 + $48,000 = $312,000.

Just Bags Produces Leather Purses -Refer to the Figure