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	$16,900 plus $0.21 per machine-hour	$	23,950
Maintenance	$38,100 plus $1.80 per machine-hour	$	76,900
Supplies	$0.60 per machine-hour	$	14,800
Indirect labor	$94,500 plus $1.60 per machine-hour	$	135,400
Depreciation	$67,500	$	69,200

During March, the company worked 23,000 machine-hours and produced 17,000 units. The company had originally planned to work 25,000 machine-hours during March.

Answer 1

					Flexible	planned	activity
					budget	Budget	variance
		machine hours			23,000	25,000
		fixed	variable
utilities		16,900	0.21		21730	22150	420	F
maintenance		38,100	1.8		79500	83100	3600	F
supplies			0.6		13800	15000	1200	F
indirect labor		94,500	1.6		131300	134500	3200	F
Depreciation		67,500			67,500	67,500	0	N
tota		217,000	4.21		313830	322250	8420	F
			cost formula = machine hours * variable cost per mh + fixed cost
			Spending variance = actual budget - flexible budget
					Flexible	Actual	Spending
					budget	Budget	variance
		machine hours			23,000	23,000
		fixed	variable
utilities		16,900	0.21		21730	23,950	2220	U
maintenance		38,100	1.8		79500	76,900	2,600	F
supplies			0.6		13800	14,800	1000	U
indirect labor		94,500	1.6		131300	135,400	4100	U
Depreciation		67,500			67,500	69,200	1,700	U
tota			4.21		313830	320,250	6,420	U