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 $0.19 per machine-hour	$	21,710
Maintenance	$38,300 plus $1.20 per machine-hour	$	54,900
Supplies	$0.80 per machine-hour	$	15,000
Indirect labor	$94,900 plus $2.00 per machine-hour	$	133,800
Depreciation	$67,800	$	69,500

During March, the company worked 17,000 machine-hours and produced 11,000 units. The company had originally planned to work 19,000 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:	Amount		Explanation
	Utilities	19530		16300+0.19(17000)
	Maintainance	58700		38300+(1.20)*17000
	Supplies	13600		0.80*17000
	Indirect Labor	128900		94900+(2*17000)
	Depreciation	67800		67800
	Total	288530
	Spending Variance	Flexible Budget	Actual Costs	Variance	F/U
	Utilities	19,530	21,710	(2,180)	U
	Maintainance	58,700	54,900	3,800	F
	Supplies	13,600	15,000	(1,400)	U
	Indirect Labor	128,900	133,800	(4,900)	U
	Depreciation	67,800	69,500	(1,700)	U
		288,530	294,910	(6,380)	U