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 $0.18 per machine-hour	$	22,060
Maintenance	$38,400 plus $1.30 per machine-hour	$	60,800
Supplies	$0.80 per machine-hour	$	17,400
Indirect labor	$94,300 plus $1.60 per machine-hour	$	130,400
Depreciation	$67,700	$	69,400
During March, the company worked 20,000 machine-hours and produced 14,000 units. The company had originally planned to work 22,000 machine-hours during March. Required: 1. Prepare a flexible budget 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 Flexible Budget For the Month Ended March 31 Utilities Maintenance Supplies Indirect labor Depreciation Total 2. 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

Solution:

Part 1 ---

Flexible Budget is a budget prepared by taking the actual activity level achieved but at standard cost/price. It is useful to compare the budget with actual level.

q is taken as actual worked done during the period 20,000 Machine Hours

FAB Corporation
Flexible Budget
For the Month Ended May 31
	$$
Utilities (16,300 + 0.18*20,000)	$19,900
Maintenance (38,400 + 1.3*20,000)	$64,400
Supplies (0.80*20,000)	$16,000
Indirect labor (94,300 + 1.60*20,000)	$126,300
Depreciation (67,700)	$67,700
Total	$294,300

Part 2 --- Spending Variance

Spending Variance is the difference between flexible budget and actual result. It may be favorable or Unfavorable.

Favorable spending variance means when actual expenses are lower than budgeted.

Unfavorable spending variance means when actual expenses are higher than budgeted.

FAB Corporation
Flexible Budget
For the Month Ended May 31			Working
	Spending Variance (difference of actual and flexible)		Actual Result (given)	Flexible Budget (as calculated in part 1)
Utilities	$2,160	U	$22,060	$19,900
Maintenance	$3,600	F	$60,800	$64,400
Supplies	$1,400	U	$17,400	$16,000
Indirect labor	$4,100	U	$130,400	$126,300
Depreciation	$1,700	U	$69,400	$67,700
Total	$5,760	U	$300,060	$294,300

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