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	$16,100 + $0.19 per machine-hour	$	21,510
Maintenance	$38,600 + $1.70 per machine-hour	$	64,700
Supplies	$0.40 per machine-hour	$	7,400
Indirect labor	$94,800 + $1.20 per machine-hour	$	118,500
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

FAB Corporation
Flexible budget
For the month ended March 31
		Flexible Budget
Machine hours	(q)	17,000
Utilities	[$16100 + ($0.19 X q)]	$     19,330
Maintenance	[$38600 + ($1.70 X q)]	$     67,500
Supplies	($0.40 X q)	$       6,800
Indirect Labour	[$94800 + ($1.20 X q)]	$ 1,15,200
Depreciation	$                             67,800	$     67,800
Total		$ 2,76,630
FAB Corporation
Activity Variance
For the month ended March 31
	Flexible Budget	Actual results	Spending Variances
Machine hours	17,000	17,000
Utilities	$                             19,330	$     21,510	$       2,180	U
Maintenance	$                             67,500	$     64,700	$       2,800	F
Supplies	$                               6,800	$       7,400	$           600	U
Indirect Labour	$                         1,15,200	$ 1,18,500	$       3,300	U
Depreciation	$                             67,800	$     69,500	$       1,700	U
Total	$                         2,76,630	$ 2,81,610	$       4,980	U

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