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 $0.19 per machine-hour	$	22,100
Maintenance	$38,400 plus $1.20 per machine-hour	$	56,200
Supplies	$0.90 per machine-hour	$	17,800
Indirect labor	$95,000 plus $1.20 per machine-hour	$	119,900
Depreciation	$67,600	$	69,300

During March, the company worked 18,000 machine-hours and produced 12,000 units. The company had originally planned to work 20,000 machine-hours during March.

Required:

1. Prepare a flexible budget for March.

FAB Corporation
Flexible Budget
For the Month Ended March 31
Machine-hours	not attempted
Utilities	not attempted
Maintenance	not attempted
Supplies	not attempted
Indirect labor	not attempted
Depreciation	not attempted
Total

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

FAB Corporation
Spending Variances
For the Month Ended March 31
Utilities	not attempted	not attempted
Maintenance	not attempted	not attempted
Supplies	not attempted	not attempted
Indirect labor	not attempted	not attempted
Depreciation	not attempted	not attempted
Total	not attempted

Answer 1

1. statement of flexible budget for March.

	FAB Corporation
	Flexible Budget For the Month Ended March 31
Machine-hours		18,000HOURS
	Calculation	Amount$
Utilities	$16,500+$0.19*18,000hours	$19,920
Maintenance	$38,400+$1.2*18,000hours	$60,000
Supplies	$0.9*18,000hours	$16,200
Indirect labor	$95,000+$1.2*18,000hours	$1,16,600
Depreciation		$67,600
Total		$1,80,320

2. . statement showing the spending variances for March.

FAB Corporation
Spending Variances For the Month Ended March 31
	Flexible budget	Actual	Spending variance
Utilities	$19,920	$22,100	$2,180U
Maintenance	$60,000	$56,200	$3,800F
Supplies	$16,200	$17,800	$1,600U
Indirect labor	$1,16,600	$1,19,900	$3,300U
Depreciation	$67,600	$69,300	$1,700U
Total	$2,80,320	$2,85,300	$4,980U

Note:

F=favorable

U=unfavorable

Actual expenditure is more than flexible budgeted expenditure then it is unfavorable and vice versa