Question

ou 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 + $0.14 per machine-hour	$	20,480
Maintenance	$38,700 + $1.30 per machine-hour	$	54,600
Supplies	$0.60 per machine-hour	$	10,000
Indirect labor	$94,700 + $1.30 per machine-hour	$	117,700
Depreciation	$67,500	$	69,200

During March, the company worked 15,000 machine-hours and produced 9,000 units. The company had originally planned to work 17,000 machine-hours during March.

Required:

1. Prepare a flexible budget for March.

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

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.)

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

Answer 1

Ans. 1	Flexible Budget
	Machine hours		15,000
		Calculations:
	Utilities	$16,300 + ($0.14 * 15,000)	$18,400
	Maintenance	$38,700 + ($1.30 * 15,000)	$58,200
	Supplies	$0.60 * 21,000	$12,600
	Indirect labor	$94,700 + ($1.30 * 15,000)	$114,200
	Depreciation	$67,500	$67,500
	Total expenses		$270,900
	*Flexible budget is prepared on the basis of actual units (machine hours).
	*Fixed expenses remain same as planning budget.
Ans. 2	FAB CORPORATION
	Spending Variances
	For the Month Ended March 31
		Actual results	Spending variance	Flexible Budget
	Machine hours	15,000			15,000
	Utilities	$20,480	$2,080	U	$18,400
	Maintenance	$54,600	$3,600	F	$58,200
	Supplies	$10,000	$2,600	F	$12,600
	Indirect labor	$117,700	$3,500	U	$114,200
	Depreciation	$69,200	$1,700	U	$67,500
	Total expenses	$271,980	$1,080	U	$270,900
	Spending variance   =   Actual results - Flexible budget
	*Increase in expenses from flexible budget to actual results =   Unfavorable.
	*Decrease in expenses from flexible budget to actual results =   Favorable.