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MensClothing Company produces mens ties since 1995. In order to reasonably plan and closely control their manufacturing costs, they use the budgeting system. The following budgeted and actual amounts are released to top management for 2020 and they asked you, a cost accountant, to prepare a performance budget report so that they can analyze all type of variances including both favourable and unfavourable.

Cost	Budget at 5,000 Units	Actual Amounts at 5,800 Units
Direct materials	$175,000	$213,000
Direct labour	236,000	245,000
Equipment depreciation	8,000	8,000
Indirect labour	54,000	62,000
Indirect materials	29,000	33,000
Rent and insurance	19,000	20,000

Instructions:

a. Prepare a static budget report for MensClothing Company for the year. (5 marks)

Cost	Budgeted costs at 5,000 units	Static Budget Variance	Actual costs at 5,800 units
Direct materials	$175,000		$213,000
Direct labour	236,000		245,000
Equipment depreciation	8,000		8,000
Indirect labour	54,000		62,000
Indirect materials	29,000		33,000
Rent and insurance	19,000		20,000

b. Prepare a flexible budget report for MensClothing Company for the year. (10 marks)

Budgeted costs at 5,000 units	Variance	Flexible Budget at actual activity level	Variance	Actual costs at 5,800 units
$175,000				$213,000
236,000				245,000
8,000				8,000
54,000				62,000
29,000				33,000
19,000				20,000

c. Are there any problems identified in part (b) that top management and a production manager should be aware of? Briefly explain. (5 marks)

d. What are advantages of the flexible budget? Briefly explain. (5 marks)

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