Question

Based on experience Moss Company has developed the following budget formula for estimating its shipping expenses:

Shipping costs = $16,000 + ($0.50 × lbs. shipped). The company's shipments average 12 lbs. per shipment.

The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule:
(Plan = P, Actual = A)
Sales orders: P = 800, A = 780
Shipments: P = 800, A = 820
United shipped: P = 8,000, A = 9,000
Sales: P = $120,000, A = $144,000
Total pounds shipped: P = $9,600, A = $12,300

The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be: (CMA adapted)
A. $20,680.
B. $20,920.
C. $20,800.
D. $22,150.

Answer 1

The appropriate monthly flexible budget allowance should be calculated as $16,000 plus $0.50 per pound shipped, which equals $20,500 for 9,000 pounds. However, none of the provided options match this value, with the closest being $20,800.

Step-by-step explanation:

To calculate the appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation, we need to use the provided budget formula and actual activity data from Moss Company. According to the budget formula, shipping costs are calculated as follows:

Shipping costs = Fixed cost + (Variable cost per pound × Total pounds shipped)

In this case, our fixed cost is $16,000, and our variable cost per pound is $0.50. The actual total pounds shipped were 9,000 pounds. Plugging these numbers into the formula gives us:

Shipping costs = $16,000 + ($0.50 × 9,000)

Shipping costs = $16,000 + $4,500
Shipping costs = $20,500

The listed options, however, do not include $20,500. This might be due to a typo either in the question or the options provided. The closest correct answer given the information provided is Option C: $20,800, but it doesn't align with the calculation based on the given formula and figures.