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	$16,800 + $0.15 per machine-hour	$	22,200
Maintenance	$38,100 + $1.80 per machine-hour	$	75,100
Supplies	$0.50 per machine-hour	$	11,800
Indirect labor	$94,400 + $1.80 per machine-hour	$	138,500
Depreciation	$68,000	$	69,700

During March, the company worked 22,000 machine-hours and produced 16,000 units. The company had originally planned to work 24,000 machine-hours during March.

Required:

1. Prepare a flexible budget for March.

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

Answer 1

1) Flexible budget

	Flexible budget
Utilities (22000*.15+16800)	20100
Maintenance (22000*1.8+38100)	77700
Supplies	11000
Indirect labor (22000*1.8+94400)	134000
Depreciation	68000
Total	310800

2) Spending variance

	Flexible budget	Actual results	Spending variance
Utilities	20100	22200	2100 U
Maintenance	77700	75100	2600 F
Supplies	11000	11800	800 U
Indirect labor	134000	138500	4500 U
Depreciation	68000	69700	1700 U
Total	310800	317300	6500 U