Novo, Inc., wants to develop an activity flexible budget for the activity of moving materials.Novo uses eight forklifts to move materials from receiving to stores. The forklifts are also usedto move materials from stores to the production area. The forklifts are obtained through an operating lease that costs $18,000 per year per forklift. Novo employs 25 forklift operators whoreceive an average salary of $50,000 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 $1.80. Fuel for a forklift costs $3.60 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 asthe activity driver.2. Calculate the activity capacity for moving materials. Suppose Novo works at 80 percent ofactivity capacity and incurs the following costs:Salaries $1,290,000Leases 144,000Crates 118,000Fuel 24,000 Prepare the budget for the 80 percent level and then prepare a performance report for themoving 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 toone-third of the original capacity. What would be the budget formula for this new activitylevel? What is the budgeted cost for this new activity level? Has activity performanceimproved? How does this activity performance evaluation differ from that described inRequirement 2? Explain.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Novo, Inc., wants to develop an activity flexible budget for the activity of moving materials.Novo 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 $18,000 per year per forklift. Novo employs 25 forklift operators who
receive an average salary of $50,000 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 $1.80. Fuel for a forklift costs $3.60 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 Novo works at 80 percent of
activity capacity and incurs the following costs:
Salaries $1,290,000
Leases 144,000
Crates 118,000
Fuel 24,000
Prepare the budget for the 80 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.
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