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: Utilities Maintenance Supplies Indirect labor Depreciation Cost Formula $ 16,500 + $0.13 per machine-hour $39,000 + $1.30 per machine-hour $0.30 per machine-hour $94,500 + $1.80 per machine-hour $67,600 Actual Cost in March $ 20,770 $ 57,500 $ 5,500 $ 129,600 $ 69,300 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

• Requirement 1

	Working Columns						Flexible Budget = ANSWER
Machine hours							17,000
							[ Fixed + (Var x Actual units)]
	Fixed part	+(	Variable part	x	Actual/Planned units	)
Utilities	$16,500	+(	$                  0.13	x	17000	)	$18,710
Maintenance	$39,000	+(	$                  1.30	x	17000	)	$61,100
Supplies	$0	+(	$                  0.30	x	17000	)	$5,100
Indirect Labor	$94,500	+(	$                  1.80	x	17000	)	$125,100
Depreciation	$67,600	+(	$                      -	x	17000	)	$67,600
Total Expenses	$217,600	+(	$4	x	17000	)	$277,610

• Requirement 2

	Actual result	Spending Variance		Flexible Budget
Machine hours	17,000			17,000
	[A]	[B = Difference between A & C]		[C = Fixed + (Var x Actual units)]
Utilities	$20,770	$2,060	U	$18,710
Maintenance	$57,500	$3,600	F	$61,100
Supplies	$5,500	$400	U	$5,100
Indirect Labor	$129,600	$4,500	U	$125,100
Depreciation	$69,300	$1,700	U	$67,600
Total Expenses	$282,670	$5,060	U	$277,610

• Workings

Conceptual notes:

#1: Flexible Budget data is based on 'budgeted rates' applied on 'actual level/output/units'

#2: Spending Variance = Difference between 'Actual data' and 'Flexible Budget data'

#3: Activity Variance = Difference between 'Flexible Budget data' and 'Static/Planned Budget data'.

* Favourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are LESS than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are LESS than Static/Planned budget expenses/costs [Activity Variance]

* Unfavourable Variance in case of Expenses/Costs occurs when:

>Actual expenses/costs are MORE than Flexible budget expense/costs [Spending Variance]

>Flexible budget expenses/costs are MORE than Static/Planned budget expenses/costs [Activity Variance]