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 plus $0.20 per machine-hour	$	21,900
Maintenance	$38,600 plus $1.10 per machine-hour	$	54,400
Supplies	$0.40 per machine-hour	$	7,800
Indirect labor	$94,100 plus $1.30 per machine-hour	$	121,000
Depreciation	$68,200	$	69,900

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. (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.)

      

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.)

     

Answer 1

1)
	Flexible Budget of Manufaturing Overhead:
	Utilities		$        19,700
	Maintenance		$        58,400
	Supplies		$          7,200
	Indirect Labor		$    1,17,500
	Depreciation		$        68,200
	Total		$    2,71,000
	Working;
a.	Utilities	=	$ 16,100.00	+	$            0.20	x	18,000	=	$       19,700
b.	Maintenance	=	$ 38,600.00	+	$            1.10	x	18,000	=	$       58,400
c.	Supplies	=			$            0.40	x	18,000	=	$         7,200
d.	Indirect Labor	=	$ 94,100.00	+	$            1.30	x	18,000	=	$   1,17,500
2)
			Flexible Budget		Actual cost in March		Variance
	Utilities		$        19,700		$       21,900		$      2,200	U
	Maintenance		$        58,400		$       54,400		$      4,000	F
	Supplies		$          7,200		$         7,800		$          600	U
	Indirect Labor		$    1,17,500		$   1,21,000		$      3,500	U
	Depreciation		$        68,200		$       69,900		$      1,700	U
		Total					$      4,000	U