Question

Myers Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows.

Indirect labor		$1.10
Indirect materials		0.70
Utilities		0.40

Fixed overhead costs per month are Supervision $4,100, Depreciation $2,000, and Property Taxes $500. The company believes it will normally operate in a range of 7,100–12,800 direct labor hours per month.

Assume that in July 2017, Myers Company incurs the following manufacturing overhead costs.

Variable Costs				Fixed Costs
Indirect labor		$11,710		Supervision		$4,100
Indirect materials		7,460		Depreciation		2,000
Utilities		3,860		Property taxes		500

(a) Prepare a flexible budget performance report, assuming that the company worked 10,900 direct labor hours during the month. (List variable costs before fixed costs.)

(b) Prepare a flexible budget performance report, assuming that the company worked 10,300 direct labor hours during the month. (List variable costs before fixed costs.)

Answer 1

flexible budget flexes the budgeted cost to actual activity incurred. only variable cost adjust to actual activity fixed cost remains constant and unchanged.

(1)10900 direct labor hours

variable costs
indirect labor [1.10*10900]	11990
indirect material [0.70*10900]	7630
utilities [0.40*10900]	4360
fixed cost
supervision	4100
depreciation	2000
property taxes	500
Total cost	30580$

	budget	Actual	difference
no of hours	10900	10900
variable costs
indirect labor	11990	11710	280 favorable
material	7630	7460	170 favorable
material utilities	4360	3860	500 favorable
Total variable costs	23980	23030	950 favorable
fixed costs
supervision	4100	4100	0 neither fav nor unfav
depreciation	2000	2000	0 neither fav nor unfav
property tax	500	500	0 neither fav nor unfav
total fixed cost	6600	6600
total cost	30580	29630	950 favorable

(2)10300

variable costs
indirect labor [1.10*10300]	11330
indirect material [0.70*10300]	7210
utilities [0.40*10300]	4120
fixed cost
supervision	4100
depreciation	2000
property taxes	500
Total cost	29260$

	budget	Actual	difference
no of hours	10900	10900
variable costs
indirect labor	11330	11710	380 unfavorable
material	7210	7460	250 unfavo
material utilities	4120	3860	260 fav
Total variable costs	22660	23030	370 fav
fixed costs
supervision	4100	4100	0 neither fav nor unfav
depreciation	2000	2000	0 neither fav nor unfav
property tax	500	500	0 neither fav nor unfav
total fixed cost	6600	6600
total cost	29260	29630	370 favorable

actual cost> budgeted variance = unfavorable

actual cost< budgeted variance = favorable