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 plus $0.13 per machine-hour	$	20,680
Maintenance	$38,300 plus $1.90 per machine-hour	$	62,500
Supplies	$0.40 per machine-hour	$	6,200
Indirect labor	$94,100 plus $1.10 per machine-hour	$	112,600
Depreciation	$68,100	$	69,800

During March, the company worked 14,000 machine-hours and produced 8,000 units. The company had originally planned to work 16,000 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
	Planning budget	Flexible budget	Activity variances
Utilities	18880	18620	260	F
Maintenance	68700	64900	3800	F
Supplies	6400	5600	800	F
Indirect labor	111700	109500	2200	F
Depreciation	68100	68100	0	None
Total	273780	266720	7060	F
2
	Actual cost	Flexible budget	Spending variances
Utilities	20680	18620	2060	U
Maintenance	62500	64900	2400	F
Supplies	6200	5600	600	U
Indirect labor	112600	109500	3100	U
Depreciation	69800	68100	1700	U
Total	271780	266720	5060	U