Question

Montgomery Company has developed the following flexible budget formulas for its four overhead items:

		Variable rate per
Overhead item	Fixed Cost	direct labor hour
Maintenance	$10,000	$3.00
Power	$1,500	$0.30
Indirect labor cost		$12.00
Equipment lease	$7,000
Total	$18,500	$15.30

Montgomery normally produces 15,000 units (each unit requires 0.30 direct labor hours); however this year 19,000 units were produced with the following actual costs:

Overhead item	Actual costs
Maintenance	$14,000
Power	$2,200
Indirect labor cost	$70,000
Equipment lease	$7,000
Total costs	$93,200

Refer to Figure 11-3. Using an after-the-fact flexible budget, calculate the total budget variance.

	a.	$12,510 U
	b.	$3,600 U
	c.	$5,000 F
	d.	$12,510 F
	e.	None of these.

Answer 1

The correct answer is "d. $12,510 F"

Calculations:

1. Variance for maintenance = Flexible budget expense - Actual expense

Variance for maintenance = (19,000*0.3*3 + 10,000) - 14,000

Variance for maintenance = $13,100 F

2. Variance for power = Flexible budget expense - Actual expense

Variance for power = (19,000*0.3*0.3 + 1,500) - 2,200

Variance for power = $1,010 F

3. Variance for indirect labor cost = Flexible budget expense - Actual expense

Variance for indirect labor cost = (19,000*0.3*12) - 70,000

Variance for indirect labor cost = $1,600 U

Therefore, total flexible budget variance = $13,100 + $1,010 - $1,600

Total flexible budget variance = $12,510 F