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 + $0.12 per machine-hour	$	20,880
Maintenance	$38,200 + $1.20 per machine-hour	$	54,800
Supplies	$0.80 per machine-hour	$	15,000
Indirect labor	$94,600 + $1.20 per machine-hour	$	118,300
Depreciation	$68,200	$	69,900

During March, the company worked 17,000 machine-hours and produced 11,000 units. The company had originally planned to work 19,000 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
Machine hours	17000
Utilities	18840	=16800+(17000*0.12)
Maintenance	58600	=38200+(17000*1.2)
Supplies	13600	=17000*0.8
Indirect labor	115000	=94600+(17000*1.2)
Depreciation	68200
Total	274240

2
	Actual cost	Flexible budget	Spending variances
Utilities	20880	18840	2040	U
Maintenance	54800	58600	3800	F
Supplies	15000	13600	1400	U
Indirect labor	118300	115000	3300	U
Depreciation	69900	68200	1700	U
Total	278880	274240	4640	U