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	$16,200 plus $0.14 per machine-hour	$	20,940
Maintenance	$38,600 plus $1.80 per machine-hour	$	70,200
Supplies	$0.60 per machine-hour	$	12,400
Indirect labor	$94,000 plus $1.20 per machine-hour	$	120,100
Depreciation	$67,500	$	69,200

During March, the company worked 19,000 machine-hours and produced 13,000 units. The company had originally planned to work 21,000 machine-hours during March.

Required:

1.	Prepare a flexible budget for March. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

      

2.	Prepare a report showing the spending variances for March. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

Solution:

Part 1 --- Flexible Budget for March

Flexible budget is a budget prepared by the management to compare and measure the performance of the company with actual result. Flexible budget is prepared by taking actual level of activity achieved during the period at budgeted cost.

Flexible Budget for March
	Flexible
Machine Hours (q)	19000
	$$
Utilities ( $16,200 plus $0.14 per *19,000)	$18,860
Maintenance ($38,600 plus $1.80*19000 machine-hour)	$72,800
Supplies ($0.60*19000)	$11,400
Indirect labor ($94,000 plus $1.20*19000)	$116,800
Depreciation	$67,500
Total	$287,360

Part 2 --- Flexible Budget Report showing spending variance

Spending variance is the difference of cost between actual result and flexible budget.

FAB Corporation
Manufacturing Overhead Flexible Budget
For the Month Ended March 31
	Actual Result	Flexible Budget	Spending Variance
Machine Hours (q)	19000	19000
Utilities	$20,940	$18,860	$2,080	U
Maintenance	$70,200	$72,800	$2,600	F
Supplies	$12,400	$11,400	$1,000	U
Indirect labor	$120,100	$116,800	$3,300	U
Depreciation	$69,200	$67,500	$1,700	U
Total	$292,840	$287,360	$5,480	U

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