Question - Paragon Inc. normally manufactures between 36,000 and 42,000 units each month. A static budget based on 36,000 units and actual results for April follows:

Budget Actual

Direct materials $172,800 $175,900

Direct labor 270,000 258,000

Variable factory overhead 115,200 109,000

Supervision 105,000 82,600

Insurance & taxes 60,000 61,500

Depreciation 84,000 88,000

$807,000 $775,000

Conversations with Paragon's accountant revealed the following information:

April's production totaled 35,000 units.

Supervision, insurance and taxes, and depreciation are fixed costs.

Should production fall below 36,000 units, supervision costs are expected to be reduced by $20,000 because of temporary layoffs.

Instructions -

a. Prepare a flexible budget for 36,000, 39,000, and 42,000 units of activity.

b. Prepare a performance report for April that can be used to judge Paragon's success or failure in meeting budgeted targets. Comment on your findings.

c. Explain the flexibility that is associated with a flexible budget.