Question

You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company’s costing system and “do what you can to help us get better control of our manufacturing overhead costs.” You find that the company has never used a flexible budget, and you suggest that preparing such a budget would be an excellent first step in overhead planning and control.

After much effort and analysis, you determined the following cost formulas and gathered the following actual cost data for March:

	Cost Formula	Actual Cost in March
Utilities	$20,600 + $0.10 per machine-hour	$	24,200
Maintenance	$40,000 + $1.60 per machine-hour	$	78,100
Supplies	$0.30 per machine-hour	$	8,400
Indirect labor	$130,000 + $0.70 per machine-hour	$	149,600
Depreciation	$70,000	$	71,500

During March, the company worked 26,000 machine-hours and produced 15,000 units. The company had originally planned to work 30,000 machine-hours during March.

Required:

1. Prepare a flexible budget for March.

2. Prepare a report showing the spending variances for March.

Answer 1

Required 1 :

FAB Corporation
Flexible budget
For the month ending March 31
Machine hours	26000
Utilities [ 20600 + 0.10 * 26000 ]	23200
Maintenance [ 40000 + 1.60 * 26000 ]	81600
Supplies [ 0.30 * 26000 ]	7800
Indirect labor [ 130000 + 0.70 * 26000 ]	148200
Depreciation	70000
Total	330800

Required 2 :

FAB Corporation
Spending variance
For the month ending March 31
	Actual	Flexible budget	Spending variance
Utilities	24200	23200	1000	U
Maintenance	78100	81600	3500	F
Supplies	8400	7800	600	U
Indirect labor	149600	148200	1400	U
Depreciation	71500	70000	1500	U
Total	331800	330800	1000	U