Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen

Exercise 11

ACTIVITY FLEXIBLE BUDGETING, PERFORMANCE REPORT, VOLUME VARIANCE
Innovator, Inc., wants to develop an activity flexible budget for the activity of moving materials. Innovator uses eight forklifts to move materials from receiving to stores. The forklifts are also used to move materials from stores to the production area. The forklifts are obtained through an operating lease that costs $12,000 per year per forklift. Innovator employs 25 forklift operators who receive an average salary of $45,000 per year, including benefits. Each move requires the use of a crate. The crates are used to store the parts and are emptied only when used in production. Crates are disposed of after one cycle (two moves), where a cycle is defined as a move from receiving to stores to production. Each crate costs $1.20. Fuel for a forklift costs $1.80 per gallon. A gallon of gas is used every 20 moves. Forklifts can make three moves per hour and are available for 280 days per year, 24 hours per day (the remaining time is downtime for various reasons). Each operator works 40 hours per week and 50 weeks per year.
Required:
1. Prepare a flexible budget for the activity of moving materials, using the number of cycles as the activity driver.
2. Calculate the activity capacity for moving materials. Suppose Innovator works at 90 percent of activity capacity and incurs the following costs:

Prepare the budget for the 90 percent level and then prepare a performance report for the moving materials activity.
3. Calculate and interpret the volume variance for moving materials. 4. Suppose that a redesign of the plant layout reduces the demand for moving materials to one-third of the original capacity.What would be the budget formula for this new activity level? What is the budgeted cost for this new activity level? Has activity performance improved? How does this activity performance evaluation differ from that described in Requirement 2? Explain.