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: Actual Cost in March 21,940 Utilities ta ta Cost Formula $16,400 plus $0.17 per machine-hour $39,000 plus $1.80 per machine-hour $0.50 per machine-hour $94,400 plus $1.90 per machine-hour $68,000 Maintenance Supplies Indirect labor Depreciation ta 72,400 10,800 137,100 69,700 ta ta During March, the company worked 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 machine-hours during March. Required: 1. Prepare a flexible budget for March. 2. Prepare a report showing the spending variances for March.

Answer 1

Ans. 1	FAB CORPORATION
	Flexible Budget
	For the Month Ended March 31
	Machine hours	20000
	Utilities	19800
	Maintenance	75000
	Supplies	10000
	Indirect labor	132400
	Depreciation	$68,000
	Total expenses	$305,200
	*Flexible budget is prepared on the basis of actual units (machine hours).
	*Fixed expenses remain same as planning budget.
	* Calculations for Flexible budget :
		Flexible Budget
	Machine hours	20000
	Utilities	$16,400 + ($0.17 * 20000)
	Maintenance	$39,000 + ($1.80 * 20000)
	Supplies	$0.50 * 20,000
	Indirect labor	$94,400 + ($1.90 * 20000)
	Depreciation	$68,000
Ans. 2	FAB CORPORATION
	Spending Variances
	For the Month Ended March 31
		Actual results	Activity variance		Flexible Budget
	Machine hours	20000			20000
	Utilities	$21,940	$2,140	U	19800
	Maintenance	$72,400	$2,600	F	75000
	Supplies	$10,800	$800	U	10000
	Indirect labor	$137,100	$4,700	U	132400
	Depreciation	$69,700	$1,700	U	$68,000
	Total expenses	$311,940	$6,740	U	$305,200
	Spending variance   =   Actual results - Flexible budget
	*Increase in expenses from flexible budget to actual results =   Unfavorable.
	*Decrease in expenses from flexible budget to actual results =   Favorable.