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	$16,500 plus $0.15 per machine-hour	$	20,550
Maintenance	$38,200 plus $1.70 per machine-hour	$	57,500
Supplies	$0.50 per machine-hour	$	7,300
Indirect labor	$94,100 plus $2.10 per machine-hour	$	126,500
Depreciation	$67,600	$	69,300

During March, the company worked 13,000 machine-hours and produced 7,000 units. The company had originally planned to work 15,000 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
FAB Corporation
For the Month Ended March
Machine-hours (q)	$    13,000.00
Utilities ($16,500 + $.15q)	$    18,450.00
Maintenance ($38,200 + $1.70q)	$    60,300.00
Supplies ($.50q)	$      6,500.00
Indirect labor	$ 121,400.00
Depreciation	$    67,600.00
Total	$ 287,250.00

2)

Spending Variances
FAB Corporation
For the Month Ended March
	Flexible Budget	Actual	Spending Variance
Machine-hours (q)	$    13,000.00	13000
Utilities ($16,500 + $.15q)	$    18,450.00	20550	$    2,100.00	Unfavorable
Maintenance ($38,200 + $1.70q)	$    60,300.00	57500	$    2,800.00	Favorable
Supplies ($.50q)	$      6,500.00	7300	$        800.00	Unfavorable
Indirect labor	$ 121,400.00	126500	$    5,100.00	Unfavorable
Depreciation	$    67,600.00	69300	$    1,700.00	Unfavorable
Total	$ 287,250.00	$ 294,150.00	$    6,900.00	Unfavorable