Prowse Corporation is an oil well service company that measures its output by the number of wells serviced. The company has prov
ided the following fixed and variable cost estimates that it uses for budgeting purposes. Fixed Element Variable Element
per Month per Well Serviced
Revenue $ 4,000
Employee
salaries and wages $ 43,800 $ 1,000
Servicing materials $ 600
Other expenses $ 38,200
A total of 42 wells were actually serviced during October. The “Other expenses” in the flexible budget for October would have been closest to:
In the flexible budget for October Other Expenses would be closest to $38,200.
Further Explanation:
Flexible budget is defined as the budget which is flexible with number of units produced in the accounting period concerned, after putting the values of variable and fixed expenses in a combined format, we put the actual expensed values to calculate the variances.
In the given instance, the flexible budget is prepared for the month of October only, and not for the complete accounting year.
Even in the flexible budget, the value of fixed expenses do not alter as fixed expenses remain static, and do not change with the level of output.
Since the flexible budget has its own format, as follows: there is no title of other expenses, these will be clubbed with general and administration expense. In that we will also club the employee salary and wages fixed, as later will not form part of cost of goods sold, and only the variable part of the later amounting $1,000 per well serviced is part of cost of goods sold.
The calculation for the Gross Profit and Operating Income is shown in the attached table.
As stated in table , direct cost form part of cost of goods sold. Other expenses are selling and administration expense.
Employee salaries and wages are fixed for executives and not for labor, also labor is directly related to the product (here well servicing) therefore that cost is part of cost of goods sold and fixed portion is part of administration expense.
Further the office expense is also part of administration expense and not of direct cost related to the product.
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