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	$16,300 plus $0.17 per machine-hour	$	21,160
Maintenance	$38,900 plus $1.40 per machine-hour	$	57,900
Supplies	$0.80 per machine-hour	$	14,200
Indirect labor	$94,800 plus $1.10 per machine-hour	$	115,500
Depreciation	$67,600	$	69,300

During March, the company worked 16,000 machine-hours and produced 10,000 units. The company had originally planned to work 18,000 machine-hours during March.

Required:

1. Prepare a flexible budget for March.

FAB Corporation Flexible Budget For the Month Ended March 31 Machine-hours Utilities Maintenance Supplies Indirect labor Depreciation Total

2. Prepare a report showing the spending variances for March.

FAB Corporation Spending Variances For the Month Ended March 31 Utilities Maintenance Supplies Indirect labor Depreciation Total

Answer 1

• All working forms part of the answer
• Requirement 1

FAB Corporation
Flexible Budget
For the Month Ended March 31
Machine-hours	16,000
Utilities	$       19,020.00
Maintenance	$       61,300.00
Supplies	$       12,800.00
Indirect labor	$     112,400.00
Depreciation	$       67,600.00
Total	$        273,120.00

--Working for above

FAB Corporation
Flexible Budget
For the Month Ended March 31
Machine-hours	16000
Utilities	=16300+(16000 actual hours x $ 0.17)
Maintenance	=38900+(16000 actual hours x $ 1.4)
Supplies	=16000 actual hours x $ 0.8
Indirect labor	=94800+(16000 actual hours x $ 1.1)
Depreciation	67600
Total

• Requirement 2

FAB Corporation
Spending Variances
For the Month Ended March 31
	Flexible Budget	Actual results	Variances
	[Working column]		[Answer column]
Utilities	$          19,020.00	$          21,160.00	$      2,140.00	Unfavourable
Maintenance	$          61,300.00	$          57,900.00	$      3,400.00	Favourable
Supplies	$          12,800.00	$          14,200.00	$      1,400.00	Unfavourable
Indirect labor	$        112,400.00	$       115,500.00	$      3,100.00	Unfavourable
Depreciation	$          67,600.00	$          69,300.00	$     1,700.00	Unfavourable
Total	$        273,120.00	$       278,060.00	$      4,940.00	Unfavourable