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	$16,800 plus $0.19 per machine-hour	$	22,780
Maintenance	$38,900 plus $1.90 per machine-hour	$	74,500
Supplies	$0.80 per machine-hour	$	17,400
Indirect labor	$94,500 plus $1.50 per machine-hour	$	128,400
Depreciation	$68,000	$	69,700

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.

2. Prepare a report showing the spending variances for March.

Answer 1

Flexible budget

Utilities (20000*.19+16800)	20600
Maintenance (20000*1.9+38900)	76900
Supplies (20000*.80)	16000
Indirect labor (20000*1.5+94500)	124500
Depreciation	68000
Total	306000

Spending variance

	Flexible budget	Actual	Spending variance
Utilities	20600	22780	2180 U
Maintenance	76900	74500	2400 F
Supplies	16000	17400	1400 U
Indirect labor	124500	128400	3900 U
Depreciation	68000	69700	1700 U
Total	306000	312780	6780 U